<PAGE> 1
SUBJECT TO COMPLETION - DATED MAY 3, 1996
[LEGEND APPEARS ON LEFT HAND MARGIN]
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. THESE
SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME
THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SEI INSTITUTIONAL INVESTMENTS TRUST
Large Cap Fund
Small Cap Fund
Core Fixed Income Fund
High Yield Bond Fund
International Fixed Income Fund
Emerging Markets Equity Fund
International Equity Fund
________ __, 1996
===============================================================================
This Prospectus sets forth concisely information about the above-referenced
funds. Please read this Prospectus carefully before investing, and keep it on
file for future reference.
A Statement of Additional Information dated _______ __, 1996 has been filed
with the Securities and Exchange Commission and is available upon request and
without charge by writing the distributor, SEI Financial Services Company, 680
East Swedesford Road, Wayne, Pennsylvania 19087-1658 or by calling
1-800-342-5734. The Statement of Additional Information is incorporated into
this Prospectus by reference.
SEI Institutional Investments Trust ("SIIT" or the "Trust") is an open-end
management investment company that offers certain institutions with investable
pools of assets that have signed an Investment Management Agreement with SEI
Financial Management Corporation a convenient means of investing in
professionally managed diversified and non-diversified portfolios of
securities.
THE HIGH YIELD BOND FUND INVESTS PRIMARILY, AND MAY INVEST ALL OF ITS ASSETS,
IN LOWER RATED BONDS, COMMONLY REFERRED TO AS "JUNK BONDS." THESE SECURITIES
ARE SPECULATIVE AND ARE SUBJECT TO GREATER RISK OF LOSS OF PRINCIPAL AND
INTEREST THAN ARE INVESTMENTS IN HIGHER RATED BONDS. BECAUSE INVESTMENT IN
SUCH SECURITIES ENTAILS GREATER RISKS, INCLUDING RISK OF DEFAULT, AN INVESTMENT
IN THE HIGH YIELD BOND FUND SHOULD NOT CONSTITUTE A COMPLETE INVESTMENT PROGRAM
AND MAY NOT BE APPROPRIATE FOR ALL INVESTORS. INVESTORS SHOULD CAREFULLY
CONSIDER THE RISKS POSED BY AN INVESTMENT IN THE HIGH YIELD BOND FUND BEFORE
INVESTING. SEE "INVESTMENT OBJECTIVES AND POLICIES," "GENERAL INVESTMENT
POLICIES AND RISK FACTORS - RISK FACTORS RELATING TO INVESTING IN LOWER RATED
SECURITIES" AND THE "APPENDIX."
===============================================================================
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE TRUST'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK. THE TRUST'S SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE
LOSS OF THE PRINCIPAL AMOUNT INVESTED.
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
=========================================================================================================================
Page
<S> <C>
ANNUAL OPERATING EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
THE TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ELIGIBLE INVESTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
GENERAL MANAGEMENT OF THE FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
THE MONEY MANAGERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
GENERAL INVESTMENT POLICIES AND RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
PURCHASE AND REDEMPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
PERFORMANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
DESCRIPTION OF PERMITTED INVESTMENTS AND RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
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<PAGE> 3
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
-------------------------------------------------------------------------------------------------------
Large Cap Small Cap Core Fixed High Yield
Fund Fund Income Fund Bond Fund
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management Fees (after fee .27% .54% .17% .38%
waivers) (1)(2)
.09%
Other Expenses(3)(4): .07% .06% .04%
-------------------------------------------------------------------------------------------------------
Total Fund Operating .34% .60% .21% .47%
Expenses (after fee
waivers)(4)
=======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
International Fixed Emerging Markets Equity International Equity
Income Fund Fund Fund
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Management Fees(after fee waivers)(1)(2) .34% .94% .38%
Other Expenses(3)(4): .27% .37% .25%
---------------------------------------------------------------------------------------------------------------------------
Total Fund Operating Expenses(after fee .61% 1.31% .63%
waivers)(4)
============================================================================================================================
</TABLE>
(1) Each shareholder must also enter into an Investment Management
Agreement with SEI Financial Management Corporation ("SFM") for
investment strategies and programs and asset allocation services, and
pays annual fees thereunder calculated as a specified percentage of
the shareholder's assets managed by SFM.
(2) SFM and SEI Management have each agreed to waive, on a voluntary
basis, a portion of its management and administration fee, and the
management fees shown reflect this voluntary waiver. SFM and SEI
Management each reserves the right to terminate its waiver at any time
in its sole discretion. Absent such fee waiver, management and
administration fees would be: Large Cap Fund, .45%, Small Cap Fund,
.70%, Core Fixed Income Fund, .35%, High Yield Bond Fund, .54%,
International Fixed Income, .50%, Emerging Markets Equity, 1.10%, and
International Equity, .70%.
(3) "Other Expenses" are based on estimated amounts for the current fiscal
year.
(4) SFM has agreed, on a voluntary basis, to waive a portion of its
management fee and/or reimburse Other Expenses to the extent necessary
to keep Total Operating Expenses from exceeding current levels, and
the Total Operating Expenses reflect these waivers and/or
reimbursements. SFM reserves the right to terminate its voluntary
waiver and/or reimbursement at any time in its sole discretion.
Absent such waivers and/or reimbursement, Total Operating Expenses
would be: Large Cap Fund, .52%, Small Cap Fund, .78%, Core Fixed
Income Fund, .42%, High Yield Bond Fund, .63%, International Fixed
Income, .83%, Emerging Markets Equity, 1.47%, and International
Equity, .95%.
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<TABLE>
<CAPTION>
EXAMPLE
- -------------------------------------------------------------------------------------------------------------
1 yr. 3 yrs.
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
An investor in a Fund would pay the following expenses on a
$1,000 investment assuming (1) a 5% annual return and (2)
redemption at the end of each time period:
Large Cap Fund . . . . . . . . . . . . . . . . . . $ 3.00 $11.00
Small Cap Fund . . . . . . . . . . . . . . . . . . $ 6.00 $19.00
Core Fixed Income Fund . . . . . . . . . . . . . . $ 2.00 $ 7.00
High Yield Bond Fund . . . . . . . . . . . . . . . $ 5.00 $15.00
International Fixed Income Fund . . . . . . . . . $ 6.00 $20.00
Emerging Markets Equity Fund . . . . . . . . . . . $13.00 $42.00
International Equity Fund . . . . . . . . . . . . $ 6.00 $20.00
- -------------------------------------------------------------------------------------------------------------
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the expense table and example is to assist the investor in
understanding the various costs and expenses that may be directly or indirectly
borne by investors in the Funds. Additional information may be found under
"General Management of the Funds" and "The Money Managers."
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<PAGE> 5
THE TRUST
================================================================================
SEI Institutional Investments Trust ("SIIT" or the "Trust") is an open-end
management investment company, organized as a Massachusetts business trust
under a Declaration of Trust dated March 1, 1995. The Declaration of Trust
permits the Trust to offer separate series ("funds") of units of beneficial
interest ("shares") and different classes of each fund. Currently, the Trust
does not intend to issue additional classes of shares. All consideration
received by the Trust for shares of any fund, and all assets of such fund
belong to that fund and would be subject to the liabilities related thereto.
The Trust pays its expenses, including the fees of its service providers, audit
and legal expenses, expenses of preparing prospectuses, proxy solicitation
materials and reports to shareholders, costs of custodial services and
registering the shares under federal and state securities laws, pricing,
insurance expenses, litigation and other extraordinary expenses, brokerage
costs, interest charges, taxes and organizational expenses.
This Prospectus offers shares of the following funds: Large Cap, Small Cap,
Core Fixed Income, High Yield Bond, International Fixed Income, Emerging
Markets Equity and International Equity Funds (each a "Fund" and, together, the
"Funds"). All of these Funds are diversified funds except for the
International Fixed Income Fund, which is a non-diversified fund. Additional
information pertaining to the Trust may be obtained by writing SEI Financial
Services Company, 680 East Swedesford Road, Wayne, Pennsylvania 19087-1658, or
by calling 1-800-342-5734.
ELIGIBLE INVESTORS
================================================================================
Shares of the Funds are currently only offered to eligible investors. Eligible
investors are principally institutions that who have investable pools of
assets, including defined benefit plans, defined contribution plans, health
care defined benefit plans and board-designated funds, insurance operating
funds, foundations, endowments, public plans and Taft-Hartley plans and have
entered into an Investment Management Agreement (the "Agreement") with SEI
Financial Management Corporation ("SFM")(collectively, "Eligible Investors").
Pursuant to the Agreement, SFM will consult with each Eligible Investor to
define its investment objectives, desired returns and tolerance for risk, and
to develop a plan for the allocation of assets among different asset classes.
The Agreement sets forth the fee to be paid to SFM, which is ordinarily
expressed as a percentage of the Eligible Investor's assets managed by SFM.
This fee, which is negotiated by the Eligible Investor and SFM, may include a
performance based fee or a fixed-dollar fee for certain specified services.
Either the Eligible Investor or SFM may terminate the Agreement upon written
notice as provided in the Agreement.
GENERAL MANAGEMENT OF THE FUNDS
================================================================================
SFM is a wholly-owned subsidiary of SEI Corporation ("SEI"), a financial
services company located in Wayne, Pennsylvania. The principal business
address of SFM is 680 East Swedesford Road, Wayne, Pennsylvania, 19087-1658.
SEI was founded in 1968, and is a leading provider of investment solutions to
banks, institutional investors, investment advisers and insurance companies.
Affiliates of SFM have provided consulting advice to institutional investors
for more than 20 years, including
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<PAGE> 6
advice regarding selection and evaluation of money managers. SFM currently
serves as manager or administrator to more than 29 investment companies,
including more than 273 funds, with more than $59 billion in assets as of
February 29, 1996.
SFM and its affiliates, SEI Fund Management ("SEI Management"), the Trust's
administrator, and SEI Financial Services Company ("SFS"), the Trust's
distributor, are responsible for providing general management, administrative,
investment advisory, portfolio management and distribution services to the
Funds. SFM is the investment adviser for each of the Funds, and operates as a
"manager of managers." As Adviser, SFM oversees the investment advisory
services provided to the Funds and manages the cash portion of the Funds'
assets. Pursuant to separate sub-advisory agreements with SFM, and under the
supervision of the Adviser and the Board of Trustees, the money managers (the
"Money Managers") are responsible for the day-to-day investment management of
all or a discrete portion of the assets of the Funds. Money Managers are
selected for the Funds based primarily upon the research and recommendations
of SFM, which evaluates quantitatively and qualitatively a Money Manager's
skills and investment results in managing assets for specific asset classes,
investment styles and strategies.
The Trust's Board of Trustees is responsible for overseeing the operation of
the Trust, including reviewing and approving the Trust's contracts with SFM and
the Money Managers. Subject to Board review, SFM allocates and, when
appropriate, reallocates the Fund's assets among Money Managers, monitors and
evaluates Money Manager performance, and oversees Money Manager compliance with
the Funds' investment objectives, policies and restrictions. SFM HAS ULTIMATE
RESPONSIBILITY FOR THE INVESTMENT PERFORMANCE OF THE FUNDS DUE TO ITS
RESPONSIBILITY TO OVERSEE MONEY MANAGERS AND RECOMMEND THEIR HIRING,
TERMINATION AND REPLACEMENT.
The Securities and Exchange Commission (the "SEC") has issued an exemptive
order (the "Order") that permits the Trust, with the approval of the Trust's
Board of Trustees, to retain Money Managers unaffiliated with SFM for a Fund
without submitting the Money Manager's contract with SFM to a vote of the
Fund's shareholders. The Order also permits the non-disclosure of amounts
payable by SFM under all such contracts. The Trust will notify shareholders
of the appropriate Fund in the event of any change in the identity of the
Money Manager(s) for a Fund.
For its management services, SFM is entitled to a fee, which is calculated
daily and paid monthly, at the following annual rates (shown as a percentage of
the average daily net assets of each Fund): Large Cap Fund, .40%; Small Cap
Fund, .65%; Core Fixed Income Fund, .30%; High Yield Bond Fund, .49%;
International Fixed Income Fund, .45%; Emerging Markets Equity Fund, 1.05%; and
International Equity Fund, .65%. The advisory fee paid by the Emerging Markets
Equity Fund is higher than that paid by most other investment companies;
however, the Board of Trustees believes that the fees are competitive with
advisory fees paid by investment companies with similar investment objectives
and policies. SFM pays each Money Manager for its services to a Fund from the
management fee SFM receives from that Fund.
SEI Management serves as transfer agent and provides shareholder recordkeeping
services to the Trust, as well as necessary office space, equipment and
personnel to operate and administer the Trust. For its services, SEI
Management is entitled to a fee from the Trust, which is calculated daily
and paid monthly, at annual rate of .05% of the average daily net assets of
each Fund.
SFS serves as the distributor pursuant to a distribution agreement with the
Trust. No compensation is paid to the distributor for distribution services
for the shares of any Fund. The principal business address for SFS is 680
East Swedesford Road, Wayne, Pennsylvania 19087-1658.
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<PAGE> 7
THE MONEY MANAGERS
================================================================================
Initially, the assets of each Fund will be allocated among the Money Managers
listed below. However, SFM may change the allocation of a Fund's assets among
Money Managers at any time.
The following table sets forth information about the Money Managers selected
for the Funds by the Boards of Trustees (as of June 3, 1996).
<TABLE>
<CAPTION>
========================================================================================
Fund Money Managers
- ----------------------------------------------------------------------------------------
<S> <C>
Large Cap Alliance Capital Management L.P.
IDS Advisory Group Inc.
Provident Investment Counsel, Inc.
LSV Asset Management
Mellon Equity Associates
MERUS-UCA Capital Management
- ----------------------------------------------------------------------------------------
Small Cap Apodaca-Johnston Capital Management
Nicholas-Applegate Capital Management
Wall Street Associates
Boston Partners Asset Management, L.P.
1838 Investment Advisors, L.P.
- ----------------------------------------------------------------------------------------
International Equity Acadian Asset Management, Inc.
Morgan Grenfell Investment Services, Ltd.
Schroder Capital Management International, Ltd.
- ----------------------------------------------------------------------------------------
Emerging Markets Equity Montgomery Asset Management, L.P.
- ----------------------------------------------------------------------------------------
Core Fixed Income Western Asset Management Company
Firstar Investment Research & Management Company
BlackRock Financial Management, Inc.
- ----------------------------------------------------------------------------------------
High Yield Bond BEA Associates
- ----------------------------------------------------------------------------------------
International Fixed Strategic Fixed Income, L.P.
Income
========================================================================================
</TABLE>
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<PAGE> 8
1838 INVESTMENT ADVISORS, L.P.
1838 Investment Advisors, L.P. ("1838") acts as a Money Manager for a portion
of the Small Cap Fund, which is also advised by SFM, Apodaca-Johnston Capital
Management, Inc., Boston Partners Asset Management, L.P., Nicholas-Applegate
Capital Management, Inc. and Wall Street Associates. As of March 31, 1996,
1838 managed $4.7 billion in assets, in large and small capitalization equity,
fixed income and balanced account funds. Clients include corporate employee
benefit plans, municipalities, endowments, foundations, jointly trusteed plans,
insurance companies and wealthy individuals. The principal address of 1838 is
100 Matsonford Road, Suite 320, Radnor, Pennsylvania 19087.
Edwin B. Powell, Joseph T. Doyle, Jr., Holly L. Guthrie and Cynthia R. Axlrod
are the Fund Managers for the portion of the Small Cap Fund's assets allocated
to 1838. These individuals work as a team and share responsibility. Mr. Doyle
has been with 1838 since 1988. Mr. Powell managed small cap equity funds for
Provident Capital Management from 1987 to 1994. Prior to joining 1838 in 1994,
Ms. Guthrie managed small cap equity funds for Provident Capital Management
from 1992 to 1994. Prior to that, she was employed by CoreStates Investment
Advisers from 1987 to 1992 as an equity analyst and fund manager. Prior to
joining 1838 in 1995, Ms. Axlrod was with Friess Associates from 1992 to 1995.
Prior to that, she was with Provident Capital Management from 1987 to 1992.
ACADIAN ASSET MANAGEMENT, INC.
Acadian Asset Management, Inc. ("Acadian") acts as a Money Manager for a
portion of the International Equity Fund, which is also advised by SFM, Morgan
Grenfell Investment Services Limited and Schroder Capital Management
International Limited. Acadian, a wholly-owned subsidiary of United Asset
Management Corporation, was founded in 1977, and manages approximately $3
billion in assets invested globally. The principal address of Acadian is Two
International Place, Boston, Massachusetts 02110.
A committee of investment professionals at Acadian are responsible for managing
the International Equity Fund's assets allocated to Acadian.
ALLIANCE CAPITAL MANAGEMENT L.P.
Alliance Capital Management L.P. ("Alliance") acts as a Money Manager for a
portion of the Large Cap Fund, which is also advised by SFM, IDS Advisory Group
Inc., LSV Asset Management, Mellon Equity Associates, MERUS-UCA Capital
Management and Provident Investment Counsel, Inc. Alliance is a registered
investment adviser organized as a Delaware limited partnership, which
originated as Alliance Capital Management Corporation in 1971. Alliance
Capital Management Corporation, an indirect wholly-owned subsidiary of The
Equitable Life Assurance Society of the United States, is the general partner
of Alliance. As of March 31, 1996, Alliance managed more than $160 billion in
assets. The principal address of Alliance is 1345 Avenue of the Americas, New
York, New York 10105.
A committee of investment professionals at Alliance manages the Large Cap
Fund's assets allocated to Alliance.
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<PAGE> 9
APODACA-JOHNSTON CAPITAL MANAGEMENT, INC.
Apodaca-Johnston Capital Management, Inc. ("Apodaca") acts as a Money Manager
for a portion of the Small Cap Fund, which is also advised by SFM, 1838, Boston
Partners Asset Management, L.P., Nicholas-Applegate Capital Management, Inc.
and Wall Street Associates. Apodaca is a California corporation that is
equally owned by Scott Johnston, Jerry Apodaca Jr., and Jerry Apodaca, Sr.
Apodaca's predecessor was founded in 1985, and as of September 30, 1995,
Apodaca had approximately $290 million in assets under management. Apodaca's
clients include pension and profit sharing plans, an endowment fund and an
investment company portfolio. The principal address of Apodaca is 50
California Street, Suite 3315, San Francisco, California 94014.
The portion of the Small Cap Fund's assets allocated to Apodaca is managed by
Scott Johnston and Jerry C. Apodaca, Jr. Mr. Johnston, a principal of Apodaca,
founded Apodaca's predecessor in 1985, and has 23 years of investment
experience. Jerry C. Apodaca, Jr. joined the firm as a principal in 1991, and
has 12 years of investment experience. Before joining Apodaca, Mr. Apodaca was
a Vice President of Marketing at Newport First Investments, Inc.
Apodaca has served as an investment adviser to only one investment company
portfolio and, as such, does not have extensive experience advising a highly
regulated entity such as an investment company.
BEA ASSOCIATES
BEA Associates ("BEA") acts as the Money Manager for the High Yield Bond Fund,
which is also advised by SFM. BEA is a general partnership organized under the
laws of the State of New York and, together with its predecessor firms, has
been engaged in the investment advisory business for more than 50 years.
Credit Suisse Capital Corporation ("CS Capital") is an 80% partner in BEA and
CS Advisers Corp., a New York corporation which is a wholly-owned subsidiary of
CS Capital, is a 20% partner in BEA. CS Capital is a wholly-owned subsidiary
of Credit Suisse Investment Corporation, which is a wholly-owned subsidiary of
Credit Suisse, the second largest Swiss bank, which, in turn, is a subsidiary
of CS Holding, a Swiss corporation. BEA is registered as an investment adviser
under the Investment Advisers Act of 1940.
BEA is a diversified asset manager, handling global equity, balanced, fixed
income and derivative securities accounts for private individuals, as well as
corporate pension and profit-sharing plans, state pension funds, union funds,
endowments and other charitable institutions. As of March 1, 1996, BEA managed
approximately $28 billion in assets. BEA's principal business address is One
Citicorp Center, 153 East 53rd Street, New York, New York 10022.
The High Yield Bond Fund's assets are managed by Richard J. Lindquist, C.F.A.
Mr. Lindquist joined BEA in 1995 as a result of BEA's acquisition of CS First
Boston Investment Management, and has had 11 years of investment management
experience, including six years of experience working with high yield bonds.
Prior to joining CS First Boston, Mr. Lindquist was with Prudential Insurance
Company of America where he managed high yield funds totalling approximately
$1.3 billion.
BLACKROCK FINANCIAL MANAGEMENT INC.
BlackRock Financial Management, Inc. ("BlackRock") acts as a Money Manager for
a portion of the Core Fixed Income Fund, which is also advised by SFM, Firstar
Investment Research & Management Company and Western Asset Management Company.
BlackRock, a registered investment adviser, is a
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<PAGE> 10
Delaware corporation. BlackRock's predecessor was founded in 1988, and as of
March 1, 1996, BlackRock had $36.5 billion in assets under management.
BlackRock is wholly-owned by PNC Asset Management Group, Inc., a wholly-owned
subsidiary of PNC Bank, N.A. PNC Bank, N.A.'s ultimate parent is PNC Bank
Corp., One PNC Plaza, Pittsburgh, Pennsylvania 15265, a bank holding company.
BlackRock provides investment advice to investment companies, trusts,
charitable organizations, pension and profit sharing plans and government
entities. BlackRock's principal business address is 345 Park Avenue, 29th
Floor, New York, New York 10154.
BlackRock employs a team approach in managing the Fund assets allocated to
BlackRock; however, the Fund Manager who has day-to-day responsibility for the
portion of the Core Fixed Income Fund's assets allocated to BlackRock is Keith
Anderson. Mr. Anderson is a Managing Director and Co-Head of Portfolio
Management at BlackRock, and has 13 years experience investing in fixed income
securities. Prior to founding BlackRock in 1988, Mr. Anderson was a Vice
President in Fixed Income Research at The First Boston Corporation.
BOSTON PARTNERS ASSET MANAGEMENT, L.P.
Boston Partners Asset Management, L.P. ("BPAM") acts as a Money Manager for a
portion of the Small Cap Fund which is also advised by SFM, 1838, Apodaca,
Nicholas-Applegate Capital Management, Inc. and Wall Street Associates. BPAM,
a Delaware limited partnership, is a registered investment adviser. BPAM's
general partner, Boston Partners, Inc., One Financial Center, 43rd Floor,
Boston, Massachusetts 02111 owns approximately 20% of BPAM's partnership
interests. Desmond J. Heathwood, Chief Investment Officer of BPAM, is the sole
shareholder of Boston's Partners, Inc. BPAM was founded in April, 1995, and as
of December 31, 1995, it had approximately $5.5 billion in assets under
management. BPAM's clients include corporations, endowments, foundations,
pension and profit sharing plans and two other investment companies. The
principal business address of BPAM is One Financial Center, 43rd Floor, Boston,
Massachusetts 02111.
The portion of the Small Cap Fund's assets allocated to BPAM is managed by
Wayne J. Archambo, C.F.A. Mr. Archambo has been employed by BPAM since its
organization, and has more than 10 years experience investing in equities.
Prior to joining BPAM, Mr. Archambo was a Senior Vice President and member of
the Equity Policy Committee at The Boston Company Asset Management, Inc.
("TBCAM"), where he participated in the creation of that firm's Small
Capitalization Value Product and Mid Capitalization Product. Prior to Joining
TBCAM in 1989, Mr. Archambo spent six years as a fund manager/analyst for
Boston-based Systematic Investors.
FIRSTAR INVESTMENT RESEARCH & MANAGEMENT COMPANY
Firstar Investment Research & Management Company ("FIRMCO") acts as a Money
Manager for a portion of the Core Fixed Income Fund, which is also advised by
SFM, BlackRock and Western Asset Management Company. FIRMCO is a registered
investment adviser, founded in 1986. As of December 31, 1995, it had
approximately $15.6 billion in assets under management. FIRMCO is a
wholly-owned subsidiary of Firstar Corporation, a bank holding company located
at 777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202. FIRMCO's clients
include pension and profit sharing plans, trusts and estates and one other
investment company. The principal business address of FIRMCO is 777 East
Wisconsin Avenue, Suite 800, Milwaukee, Wisconsin 53202.
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<PAGE> 11
Mr. Charles Groeschell, a Senior Vice President of FIRMCO, has been employed by
FIRMCO or its affiliates since 1983, and has had 13 years experience in fixed
income investing. Mr. Groeschell manages the portion of the Core Fixed Income
Fund's assets that is allocated to FIRMCO.
IDS ADVISORY GROUP INC.
IDS Advisory Group Inc. ("IDS") acts as a Money Manager for a portion of the
Large Cap Fund, which is also advised by SFM, Alliance, LSV Asset Management,
Mellon Equity Associates, MERUS-UCA Capital Management and Provident Investment
Counsel, Inc. IDS is a registered investment adviser and wholly-owned
subsidiary of American Express Financial Corporation. As of March 1, 1996, IDS
managed over $24 billion in assets with $5 billion of this total in large
capitalization growth domestic equities. IDS was founded in 1972 to manage
tax-exempt assets for institutional clients. The principal business address of
IDS is IDS Tower 10, Minneapolis, Minnesota 55440.
A committee composed of eight investment fund managers of the equity investment
team has been managing the Large Cap Fund's assets allocated to IDS since the
Fund's inception. No individual person is primarily responsible for making
recommendations to that committee.
LSV ASSET MANAGEMENT
LSV Asset Management ("LSV") acts as a Money Manager for a portion of the Large
Cap Fund, which is also advised by SFM, Alliance, IDS, Mellon Equity
Associates, MERUS-UCA Capital Management and Provident Investment Counsel, Inc.
LSV is a registered investment adviser organized as a Delaware general
partnership, in which an affiliate of SFM owns a majority interest. The
principal business address of LSV is 181 W. Madison Avenue, Chicago, Illinois
60602.
LSV makes investment decisions based on a quantitative computer model and,
based on its ongoing research and statistical analysis, makes adjustments to
the model. Securities are identified for purchase or sale by the Portfolio
based upon the computer model and defined variance tolerances. Purchases and
sales are effected by LSV based upon the output from the model.
Investment decisions for the Large Cap Fund's assets allocated to LSV are made
by the quantitative computer model. Josef Lakonishok, Andrei Shleifer and
Robert Vishny, officers of LSV, monitor the quantitative analysis model on a
continuous basis, and make adjustments to the model based on their ongoing
research and statistical analysis. Securities are identified for purchase or
sale by the Fund based upon the computer model and defined variance tolerances.
Purchases and sales are effected by LSV based upon the output from the model.
MELLON EQUITY ASSOCIATES
Mellon Equity Associates ("MEA") acts as a Money Manager for a portion of the
Large Cap Fund, which is also advised by SFM, Alliance, IDS, LSV, MERUS-UCA
Capital Management and Provident Investment Counsel, Inc. MEA is a
Pennsylvania business trust founded in 1987, whose beneficial owners are Mellon
Bank, N.A. and MMIP, Inc. MEA is a professional investment counseling firm
that provides investment management services to the equity and balanced
pension, public fund and profit-sharing investment management markets, and is
an investment adviser registered under the Investment Advisers Act of 1940, as
amended. As of December 31, 1995, MEA had discretionary
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<PAGE> 12
management authority with respect to approximately $8.8 billion of assets.
MEA's predecessor organization had managed domestic equity tax-exempt
institutional accounts since 1947. The principal business address for MEA is
500 Grant Street, Suite 3700, Pittsburgh, Pennsylvania 15258.
William P. Rydell and Robert A. Wilk manage the Large Cap Fund's assets
allocated to MEA. Mr. Rydell is the President and Chief Executive Officer of
MEA, and has been managing individual and collectivized portfolios at MEA since
1982. Mr. Wilk is a Senior Vice President and Portfolio Manager of MEA, and
has been involved with securities analysis, quantitative research, asset
allocation, trading and client services at MEA since April 1990. Prior to
joining MEA, Mr. Wilk was in charge of portfolio management and conducted
quantitative research for another investment subsidiary of Mellon Bank
Corporation, Triangle Portfolio Associates.
MERUS-UCA CAPITAL MANAGEMENT
MERUS-UCA Capital Management ("MERUS-UCA") acts as a Money Manager for a
portion of the Large Cap Fund, which is also advised by SFM, Alliance, IDS,
LSV, MEA and Provident Investment Counsel, Inc. MERUS-UCA is a separate
division of Union Bank of California, N.A. and provides equity and fixed-income
management services to a broad array of corporate and municipal clients. As of
December 31, 1995, MERUS-UCA had discretionary management authority with
respect to approximately $11.9 billion of assets. The principal address of
MERUS-UCA is 475 Sansom Street, San Francisco, California 94111.
A committee of investment professionals at MERUS-UCA manages the Large Cap
Fund's assets allocated to MERUS-UCA.
MONTGOMERY ASSET MANAGEMENT, L.P.
Montgomery Asset Management, L.P. ("MAM") acts as a Money Manager for the
Emerging Markets Equity Fund, which is also advised by SFM. MAM is an
independent affiliate of Montgomery Securities, a San Francisco-based
investment banking firm. As of February 29, 1996, MAM had approximately $7.1
billion in assets under management. MAM has over four years experience
providing investment management services. The principal address of MAM is 600
Montgomery Street, San Francisco, California 94111.
Josephine S. Jimenez and Bryan L. Sudweeks share primary responsibility for the
Emerging Markets Equity Fund's assets allocated to Morgan Grenfell. Ms.
Jimenez and Dr. Sudweeks have thirteen years and six years experience,
respectively, in emerging markets investment. Both joined MAM in 1991.
MORGAN GRENFELL INVESTMENT SERVICES LIMITED
Morgan Grenfell Investment Services Limited ("Morgan Grenfell") acts as a Money
Manager for a portion of the International Equity Fund, which is also advised
by SFM, Acadian and Schroder Capital Management International Limited. Morgan
Grenfell, a subsidiary of Morgan Grenfell Asset Management Limited, managed
over $12 billion in assets as of December 31, 1995. Morgan Grenfell Asset
Management Limited, a wholly-owned subsidiary of Deutsche Bank, A.G., a German
financial services conglomerate, managed over $94 billion in assets as of
December 31, 1995. Morgan Grenfell
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<PAGE> 13
has over 11 years experience in managing international funds for North American
clients. It employs more than 15 European investment professionals. Morgan
Grenfell attempts to exploit perceived inefficiencies present in the European
markets with original research and an emphasis on stock selection. The
principal address of Morgan Grenfell is 20 Finsbury Circus, London, EC2M 1NB.
Julian R. Johnston and Jeremy G. Lodwick share primary responsibility for the
portion of the International Equity Fund's assets allocated to Morgan Grenfell.
Mr. Johnston has 20 years experience in European equity investment. Mr.
Johnston joined Morgan Grenfell in 1984 and is currently the head of the Morgan
Grenfell Continental European investment team. He speaks French, German,
Swedish and Danish fluently. Mr. Lodwick has ten years experience in European
equity investment. He joined Morgan Grenfell in 1986 and was a UK equity
research analyst before moving to New York where he was a member of the client
liaison and marketing team for five years. He returned to the London office in
1991 to manage European equity funds.
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT, INC.
Nicholas-Applegate Capital Management, Inc. ("Nicholas-Applegate") acts as a
Money Manager for a portion of the Small Cap Fund, which is also advised by
SFM, 1838, Apodaca, BPAM and Wall Street Associates.
Nicholas-Applegate has operated as an investment adviser that provides
investment services to employee benefit plans, endowments, foundations, other
institutions and investment companies since 1984. As of December 31, 1995,
Nicholas-Applegate had discretionary management authority with respect to
approximately $29 billion of assets. Nicholas-Applegate, pursuant to a
partnership agreement, is controlled by its general partner, Nicholas-Applegate
Capital Management Holdings, L.P. a limited partnership controlled by Arthur E.
Nicholas. The principal business address of Nicholas-Applegate is 600 West
Broadway, 29th Floor, San Diego, California 92101.
Nicholas-Applegate manages the Small Cap Fund's assets allocated to
Nicholas-Applegate through its management team under the supervision of Mr.
Nicholas, founder and Chief Investment Officer of the firm.
Nicholas-Applegate's systems driven investment team, headed by Lawrence S.
Speidell, is primarily responsible for the day-to-day management of the Fund's
assets allocated to Nicholas-Applegate. Mr. Speidell has been a fund manager
and investment team leader with Nicholas-Applegate since March, 1994. Prior
to joining Nicholas-Applegate, he was an institutional portfolio manager with
Batterymarch Financial Management.
PROVIDENT INVESTMENT COUNSEL, INC.
Provident Investment Counsel, Inc. ("Provident") acts as a Money Manager for a
portion of the Large Cap Fund, which is also advised by SFM, Alliance, IDS,
LSV, MEA and MERUS-UCA.
Provident is a registered investment adviser, which, through its predecessors,
has been in business since 1951, and is a wholly-owned subsidiary of UAM.
Provident provides investment advice to corporations, public entities,
foundations and labor unions, as well as to other investment companies. As of
December 31, 1995, Provident had over $16 billion in client assets under
management.
The principal business address of Provident is 300 North Lake Avenue, Pasadena,
California 91101.
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<PAGE> 14
A team consisting of the senior investment professionals is responsible for the
development of investment policy and strategy. The implementation of these
decisions for the portion of the Large Cap Fund's assets allocated to Provident
is the responsibility of Lauro Guerra, Executive Vice President, and Jeffrey J.
Miller, Managing Director. Mr. Guerra has been with Provident since 1983 and
Mr. Miller has been with the firm since 1972.
SCHRODER CAPITAL MANAGEMENT INTERNATIONAL LIMITED
Schroder Capital Management International Limited ("SC") acts as a Money
Manager for a portion of the International Equity Fund, which is also advised
by SFM, Acadian and Morgan Grenfell. SC was founded in January 1989 and is a
wholly-owned indirect subsidiary of Schroders plc, the holding company parent
of an investment banking and investment management group of companies (the
"Schroder Group"). The investment management operations of the Schroder Group
are located in 17 countries worldwide, including seven in Asia. As of December
31, 1995, the Schroder Group had over $110 billion in assets under management.
As of that date, SC, together with the U.S. affiliate, Schroder Capital
Management International, Inc., 787 Seventh Avenue, New York, New York, had
over $16 billion in assets under management.
The Schroder Group has research resources throughout the Asian region,
consisting of offices in Tokyo, Hong Kong, Singapore, Kuala Lumpur, Seoul,
Taipei Sydney, Bangkok, Shanghai and Jakarta, staffed by 41 investment
professionals. SC's investment process emphasizes individual stock selection
and company research conducted by professionals at each local office, which is
integrated into SC's global research network by the manager of research in
London. The principal address of SC is 33 Gutter Lane, London EC2V 8AS,
England.
John S. Ager, Louise Croset and Donald H.M. Farquharson share primary
responsibility for SC's portion of the Fund. John S. Ager is a Senior Vice
President and Director of SC. Mr. Ager has more than 20 years of experience in
managing client accounts invested in Asian countries and has been with the
Schroder Group since 1969 and with SC since 1989. Ms. Croset is a First Vice
President and has been with SC since 1993. Prior to joining SC, Ms. Croset
served as a Stock Analyst/Fund Manager with Wellington Management Company from
1987-1993. Mr. Farquharson is a First Vice President of SC and has been with
the Schroder Group since 1983 and with SC since 1995.
STRATEGIC FIXED INCOME L.P.
Strategic Fixed Income L.P. ("SFI") acts as the Money Manager for the
International Fixed Income Fund, which is also advised by SFM. SFI is a
limited partnership formed in 1991 under the laws of the State of Delaware, to
manage multi-currency fixed income funds. The general partner of the firm is
Kenneth Windheim and the limited partner is Strategic Investment Management
("SIM"). As of March 1, 1995, SFI had approximately $5.4 billion of client
assets under management. The principal address of SFI is 1001 Nineteenth
Street North, 17th Floor, Arlington, Virginia 22209.
Kenneth Windheim, President of SFI, is the portfolio manager of the
International Fixed Income Fund. Mr. Windheim is assisted by Gregory Barnett
and David Jallits, Directors of SFI and Fund Managers since the Fund's
inception. Prior to forming SFI, Kenneth Windheim managed a global fixed
income portfolio at Prudential Asset Management. Prior to joining SFI, Gregory
Barnett was portfolio manager for the Pilgrim Multi-Market Income Fund with
active use of foreign exchange option
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<PAGE> 15
strategies. Prior to that, he was vice president and senior fixed income
portfolio manager at Lexington Management. Prior to joining SFI, David Jallits
was senior Portfolio Manager for a hedge fund at Teton Partners. From 1982 to
1994, he was Vice President and Global Fixed Income Portfolio Manager at The
Putnam Companies.
WALL STREET ASSOCIATES
Wall Street Associates ("WSA") serves as a Money Manager for a portion of the
Small Cap Fund, which is also advised by SFM, 1838, Apodaca, BPAM and
Nicholas-Applegate. WSA was founded in 1987, and as of December 31, 1995, had
approximately $900 million in assets under management. WAS provides investment
advisory services for institutional clients, an investment partnership for
which it serves as general partner, a group trust, for which it serves as sole
investment manager, and an offshore fund for foreign investors for which it
serves as the sole investment manager. The principal business address of WSA
is at 1200 Prospect Street, Suite 100, La Jolla, California 92037.
William Jeffery III, Kenneth F. McCain, and Richard S. Coons, each of whom owns
1/3 of WSA, serve as fund managers for the portion of the Small Cap Fund's
assets allocated to WSA. Each is a principal of WSA and, together, they have
73 years of investment management experience.
WSA has served as an investment sub-adviser to only one registered investment
company (since June 28, 1995), and, as such, does not have extensive experience
advising a highly regulated entity such as an investment company.
WESTERN ASSET MANAGEMENT COMPANY
Western Asset Management Company ("Western") acts as a Money Manager for a
portion of the Core Fixed Income Fund, which is also advised by SFM, BlackRock
and FIRMCO. Western is a wholly-owned subsidiary of Legg Mason, Inc., a
financial services company located in Baltimore, Maryland. Western was founded
in 1971 and specializes in the management of fixed income funds. As of March
31, 1996, Western managed approximately $19.8 billion in client assets,
including $3 billion of investment company assets. The principal business
address of Western is 117 East Colorado Boulevard, Pasadena, California 91105.
Kent S. Engel, Director and Chief Investment Officer of Western, is primarily
responsible for the day-to-day management of the portion of the Core Fixed
Fund's assets allocated to Western. Mr. Engel has been with Western and its
predecessor since 1969.
INVESTMENT OBJECTIVES AND POLICIES
================================================================================
Each Fund's investment objective and policies are set forth below. See
"General Investment Policies and Risk Factors" for information about
additional investment practices that some or all of the Funds may employ.
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<PAGE> 16
LARGE CAP FUND
The investment objective of the Large Cap Fund is long-term growth of capital
and income. There can be no assurance that the Fund will achieve its
investment objective.
Under normal market conditions, the Fund will invest at least 65% of its total
assets in equity securities of large companies (i.e., companies with market
capitalizations of more than $1 billion at the time of purchase). Any
remaining assets may be invested in fixed income securities or in equity
securities of smaller companies that the Fund's Money Managers believe are
appropriate in light of the Fund's objective. Fixed income securities must be
rated investment grade or better, i.e., rated in one of the four highest rating
categories by a nationally recognized statistical rating organization
("NRSRO"), or, if not rated, determined to be of comparable quality by the
Fund's Money Managers. Fixed income securities rated in the fourth highest
rating category lack outstanding investment characteristics, and have
speculative characteristics as well.
SMALL CAP FUND
The investment objective of the Small Cap Fund is capital appreciation. There
can be no assurance that the Fund will achieve its investment objective.
Under normal market conditions, the Fund will invest at least 65% of its total
assets in the equity securities of smaller companies (i.e., companies with
market capitalizations of less than $1 billion at the time of purchase). Any
remaining assets may be invested in fixed income securities or in equity
securities of larger companies that the Fund's Money Managers believe are
appropriate in light of the Fund's objective. Fixed income securities must be
rated investment grade or better, i.e., rated in one of the four highest rating
categories by an NRSRO, or, if not rated, determined to be of comparable
quality by the Fund's Money Managers. Fixed income securities rated in the
fourth highest rating category lack outstanding investment characteristics,
and have speculative characteristics as well.
CORE FIXED INCOME FUND
The investment objective of the Core Fixed Income Fund is current income
consistent with the preservation of capital. There can be no assurance that
the Fund will achieve its investment objective.
Under normal market conditions, the Fund will invest at least 65% of its total
assets in fixed income securities that are rated investment grade or better,
i.e., rated in one of the four highest rating categories by an NRSRO at the
time of purchase, or, if not rated are determined to be of comparable quality
by the Fund's Money Managers. Fixed income securities rated in the fourth
highest rating category lack outstanding investment characteristics, and have
speculative characteristics as well.
The Fund may acquire all types of fixed income securities issued by domestic
and foreign private and governmental issuers, including mortgage-backed and
asset-backed securities. The Fund may invest not only in traditional fixed
income securities, such as bonds and debentures, but in structured securities
that make interest and principal payments based upon the performance of
specified assets or indices. Structured securities include mortgage-backed
securities such as pass-through certificates, collateralized mortgage
obligations and interest and principal only components of mortgage-backed
securities. The Fund may also invest in mortgage dollar roll transactions and
Yankee obligations.
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<PAGE> 17
The Core Fixed Income Portfolio invests in a portfolio with a dollar-weighted
average duration that will, under normal market conditions, stay within plus or
minus 20% of what the Money Managers believe to be the average duration of the
domestic bond market as a whole. The Money Managers base their analysis of the
average duration of the domestic bond market on bond market indices which they
believe to be representative. The Money Managers currently use the Lehman
Aggregate Bond Index for this purpose.
HIGH YIELD BOND FUND
The investment objective of the High Yield Bond Fund is to maximize total
return. There can be no assurance that the Fund will achieve its investment
objective.
Under normal market conditions, the Fund will invest at least 65% of its total
assets in fixed income securities that are rated below investment grade i.e.,
rated below the top four rating categories by a NRSRO at the time of purchase,
or, if not rated, determined to be of comparable quality by the Fund's Money
Manager. Below investment grade securities are commonly referred to as "junk
bonds," and generally entail increased credit and market risk. The achievement
of the Fund's investment objective may be more dependent on the Money Manager's
own credit analysis than would be the case if the Fund invested in higher rated
securities. There is no bottom limit on the ratings of high yield securities
that may be purchased and held by the Fund. These securities may have
predominantly speculative characteristics or may be in default. Any remaining
assets may be invested in equity, investment grade fixed income and money
market securities that the Money Manager believes are appropriate in light of
the Fund's objective.
The Fund may acquire all types of fixed income securities issued by domestic
and foreign private and governmental issuers, including mortgage-backed and
asset-backed securities. The Fund may also invest in Yankee obligations. The
Fund's Money Manager may vary the average maturity of the securities in the
Fund without limit, and there is no restriction on the maturity of any
individual security.
The "Appendix" to this Prospectus sets forth a description of the bond rating
categories of several NRSROs. Ratings of each NRSRO represents its opinion of
the safety of principal and interest payments (and not the market risk) of
bonds and other fixed income securities it undertakes to rate at the time of
issuance. Ratings are not absolute standards of quality and may not reflect
changes in an issuer's creditworthiness. Accordingly, although the Fund's
Money Manager will consider ratings, it will perform its own analyses and will
not rely principally on ratings. The Fund's Money Manager will consider, among
other things, the price of the security and the financial history and
condition, the prospects and the management of an issuer in selecting
securities for the Fund.
INTERNATIONAL FIXED INCOME FUND
The International Fixed Income Fund seeks to provide capital appreciation and
current income. There can be no assurance that the Fund will achieve its
investment objective.
Under normal market conditions, the Fund will invest in at least 65% of its
total assets in investment grade fixed income securities of non-U.S. issuers
located in at least three countries other than the
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<PAGE> 18
United States. Any remaining assets may be invested in obligations issued or
guaranteed as to principal and interest by the United States Government, its
agencies or instrumentalities and preferred stocks. The Fund also may engage
in short selling against the box. Although the Fund will concentrate its
investments in relatively developed countries, the Fund may invest in
securities of companies located in and governments of emerging market
countries, including countries formerly controlled by communist governments.
Investments in such emerging markets countries will not exceed 5% of the Fund's
total assets at the time of purchase. Such investments entail risks which
include the possibility of political or social instability, adverse changes in
investment or exchange control regulations, expropriation and withholding of
dividends at the source. In addition, such securities may trade with less
frequency and volume than securities of companies and governments of more
developed, stable nations.
The Fund may acquire all types of fixed income securities issued by foreign
private and governmental issuers, including mortgage-backed and asset-backed
securities. The Fund may invest not only in traditional fixed income
securities, such as bonds and debentures, but in structured securities that
derive interest and principal payments from specified assets or indices. All
such investments will be in investment grade securities denominated in various
currencies, including the European Currency Unit. Investment grade securities
are rated in one of the highest four rating categories by a NRSRO, or, if not
rated, determined to be of comparable quality as determined by the Fund's Money
Managers. Fixed income securities rated in the fourth highest rating category
lack outstanding investment characteristics, and have speculative
characteristics as well.
There are no restrictions on the average maturity of the Fund or the maturity
of any single instrument. Maturities may vary widely depending on the Fund's
Money Managers' assessment of interest rate trends and other economic and
market factors.
The dollar amount of short sales at any one time shall not exceed 25% of the
net equity of the Fund, and the value of the securities of any one issuer in
which the Fund is short may not exceed the lesser of 2.0% of the value of the
Fund's net assets or 2.0% of the securities of any class of any issuer. Short
sales may be made only in securities that are fully listed on a national
securities exchange. This provision does not apply to short sales against the
box.
The Fund is a non-diversified fund. Investment in a non-diversified company
may entail greater risk than investment in a diversified company. The Fund's
ability to focus its investments on a fewer number of issuers means that
economic, political or regulatory developments affecting the Fund's investment
securities could have a greater impact on the total value of the Fund than
would be the case if the Fund were diversified among more issuers. The Fund
intends to comply with the diversification requirements of Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). See "Taxes" for
additional information.
EMERGING MARKETS EQUITY FUND
The Emerging Markets Equity Fund seeks to provide capital appreciation. There
can be no assurance that the Fund will achieve its investment objective.
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<PAGE> 19
Under normal market conditions, the Fund will invest at least 65% of its total
assets in the equity securities of emerging market issuers. The Fund's Money
Manager considers emerging market countries to be countries that possess an
emerging or developing economy and market according to the World Bank or the
United Nations. The Fund's Money Manager considers emerging market issuers to
be companies the securities of which are principally traded in the capital
markets of emerging market countries; that derive at least 50% of their total
revenue from either goods produced or services rendered in emerging market
countries, regardless of where the securities of such companies are principally
traded; or that are organized under the laws of and have a principal office in
an emerging market country. Under normal market conditions, the Fund maintains
investments in at least six emerging market countries and does not invest more
than 35% of its total assets in any one country. Any remaining assets may be
invested in fixed income securities of emerging market governments and
companies. Certain securities issued by governments of emerging market
countries are or may be eligible for conversion into investments in emerging
market companies under debt conversion programs sponsored by such governments.
The Fund may invest up to 5% of its total assets in securities that are rated
below investment grade. Bonds rated below investment grade are often referred
to as "junk bonds." Such securities involve greater risk of default or price
decline than investment grade securities. See "Risks Factors Relating to
Investing in Lower Rated Securities" in "General Investment Policies and Risk
Factors."
When in the Fund's Money Manager's opinion there is an insufficient supply of
suitable securities from emerging market issuers, the Fund may invest up to 20%
of its total assets in the equity securities of non-emerging market companies
contained in the Morgan Stanley Capital International Europe, Australia and Far
East Index (the "EAFE Index"). These companies typically have larger average
market capitalizations than the emerging market companies in which the Fund
generally invests.
Securities of non-U.S. issuers purchased by the Fund may be purchased in
foreign markets, on U.S. registered exchanges or the over-the-counter market.
The Fund will typically invest in equity securities listed on recognized
foreign exchanges, but may also invest in securities traded in over-the-counter
markets.
INTERNATIONAL EQUITY FUND
The International Equity Fund seeks to provide capital appreciation. There can
be no assurance that the Fund will achieve its investment objective.
Under normal market conditions, the Fund will invest at least 65% of its total
assets in the equity securities of non-U.S. issuers located in at least three
different countries other than the United States. Any remaining assets will
be invested in U.S. or non-U.S. cash reserves and money market instruments.
Securities of non-U.S. issuers purchased by the Fund may be purchased in
foreign markets, on U.S. registered exchanges or the over-the-counter market.
The Fund will typically invest in equity securities listed on recognized
foreign exchanges, but may also invest in securities traded in over-the-counter
markets.
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<PAGE> 20
GENERAL INVESTMENT POLICIES AND RISK FACTORS
================================================================================
BORROWING
Each Fund may borrow money to meet redemptions or for temporary, emergency
purposes. No Fund will purchase securities while its borrowings exceed 5% of
its total assets.
CONVERTIBLE SECURITIES
Each Fund may invest in convertible securities.
FORWARD FOREIGN CURRENCY CONTRACTS
The High Yield Bond, International Fixed Income, Emerging Markets Equity and
International Equity Funds may enter into forward foreign currency contracts.
ILLIQUID SECURITIES
Each Fund may invest in illiquid securities, including illiquid restricted
securities, up to 15% of their respective net assets. However, restricted
securities, including Rule 144A securities and section 4(2) commercial paper,
that meet the criteria established by the Board of Trustees of the Trust will
be considered liquid. In addition, the Emerging Markets Equity Fund's Money
Managers believe that carefully selected investments in joint ventures,
cooperatives, partnerships, private placements, unlisted securities and other
similar situations (collectively, "special situations") could enhance its
capital appreciation potential. Investments in special situations may be
illiquid, as determined by the Emerging Markets Equity Fund's Money Manager
based on criteria approved by the Board of Trustees. To the extent these
investments are deemed illiquid, the Emerging Markets Equity Fund's investment
in them will be consistent with its 15% restriction on investment in illiquid
securities.
INVESTMENT COMPANY SECURITIES AND PASSIVE FOREIGN INVESTMENT COMPANIES
Each Fund may invest up to 10% of its total assets in securities issued by
investment companies, including for the Emerging Markets Equity and
International Equity Funds, investments in securities issued by foreign
investment companies. Investing in investment companies results in the
layering of expenses. There are legal limits on the amount of such securities
that may be acquired by a Fund. Each Fund may invest in the securities of
investment companies that have similar investment objectives and policies to
that Fund.
RISK FACTORS RELATING TO INVESTING IN LOWER RATED SECURITIES
The High Yield Bond and Emerging Markets Equity Funds may invest in lower rated
securities. Fixed income securities are subject to the risk of an issuer's
ability to meet principal and interest payments on the obligation (credit
risk), and may also be subject to price volatility due to such factors as
interest rate sensitivity, market perception of the creditworthiness of the
issuer and general market liquidity (market risk). Lower rated or unrated
(i.e., high yield) securities are more likely to react to developments
affecting market and credit risk than are more highly rated securities, which
primarily react to movements in the general level of interest rates. The
market values of fixed income securities tend to vary inversely with the level
of interest rates. Yields and market values of high yield securities will
fluctuate over time, reflecting not only changing interest rates but the
market's perception of credit quality and the outlook for economic growth.
When economic conditions appear to be deteriorating, medium to lower rated
securities may decline in value due to heightened concern over credit quality,
regardless of prevailing interest rates. Investors should carefully consider
the relative
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<PAGE> 21
risks of investing in high yield securities and understand that such securities
generally are not meant for short-term investing.
The high yield market is relatively new and its growth paralleled a long period
of economic expansion and an increase in merger, acquisition and leveraged
buyout activity. Adverse economic developments can disrupt the market for high
yield securities, and severely affect the ability of issuers, especially highly
leveraged issuers, to service their debt obligations or to repay their
obligations upon maturity which may lead to a higher incidence of default on
such securities. In addition, the secondary market for high yield securities,
which is concentrated in relatively few market makers, may not be as liquid as
the secondary market for more highly rated securities. As a result, a Fund's
Money Managers could find it more difficult to sell these securities or may be
able to sell the securities only at prices lower than if such securities were
widely traded. Furthermore, a Fund may experience difficulty in valuing
certain securities at certain times. Prices realized upon the sale of such
lower rated or unrated securities, under these circumstances, may be less than
the prices used in calculating such Fund's net asset value.
Prices for high yield securities may be affected by legislative and regulatory
developments. These laws could adversely affect a Fund's net asset value and
investment practices, the secondary market for high yield securities, the
financial condition of issuers of these securities and the value of outstanding
high yield securities. For example, federal legislation requiring the
divestiture by federally insured savings and loan associations of their
investments in high yield bonds and limiting the deductibility of interest by
certain corporate issuers of high yield bonds adversely affected the market in
recent years.
Lower rated or unrated fixed income obligations also present risks based on
payment expectations. If an issuer calls the obligations for redemption, a
Fund may have to replace the security with a lower yielding security, resulting
in a decreased return for investors. If a Fund experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the Fund's investment portfolio and
increasing the exposure of the Fund to the risks of high yield securities.
OBLIGATIONS OF SUPRANATIONAL ENTITIES
The Core Fixed Income, International Fixed Income, Emerging Markets Equity and
International Equity Funds may invest in obligations of supranational entities.
OPTIONS AND FUTURES
Each Fund may purchase or write options (including options on non-U.S. indices
and currencies), futures (including futures on U.S. Treasury obligations and
Eurodollar instruments) and options on futures. Risks associated with
investing in options and futures may include lack of a liquid secondary market,
trading restrictions which may be imposed by an exchange, government
regulations which may restrict trading, an imperfect correlation between the
prices of securities held by a Fund and the price of an option or future and,
in the case of non-U.S. futures and options, the risks of investing in foreign
markets generally.
PORTFOLIO TURNOVER RATE
Each Fund's annual portfolio turnover rate will generally not exceed 150%,
except for the Core Fixed Income Fund's portfolio turnover rate which will
generally not exceed 300%. Such rates, if achieved, will result in higher
transaction costs and may result in additional taxes for shareholders. See
"Taxes."
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SECURITIES LENDING
Each Fund may lend its fund securities in order to realize additional income.
SECURITIES OF FOREIGN ISSUERS
Each Fund may invest in securities of foreign issuers consistent with its
overall policies, either directly or through American Depository Receipts
("ADRs") and, with respect to the Emerging Markets Equity and International
Equity Funds, Continental Depository Receipts ("CDRs"), European Depository
Receipts ("EDRs") and Global Depository Receipts ("GDRs").
TEMPORARY DEFENSIVE/LIQUIDITY NEEDS
In order to meet liquidity needs, or for temporary defensive purposes, each
Fund may invest up to 100% of its assets in cash and money market securities.
VARIABLE AND FLOATING RATE INSTRUMENTS
Each Fund may purchase instruments that pay interest on a variable or floating
rate basis.
WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES
Each Fund may purchase securities on a when-issued or delayed-delivery basis,
including TBA mortgage-backed securities.
WARRANTS
Each Fund may purchase warrants.
For additional information regarding the Funds' permitted investments, see
"Description of Permitted Investments and Risk Factors" in this Prospectus and
"Description of Permitted Investments" in the Statement of Additional
Information. For a description of the above ratings, see the "Appendix."
ZERO COUPON, PAY-IN-KIND AND DEFERRED PAYMENT SECURITIES
The Large Cap, Small Cap, Core Fixed Income, High Yield Bond and International
Fixed Income Funds may invest in zero coupon, pay-in-kind and deferred payment
securities.
INVESTMENT LIMITATIONS
================================================================================
The investment objectives and certain of the investment limitations are
fundamental policies of the Funds. Fundamental policies cannot be changed with
respect to the Trust or a Fund without the consent of the holders of a majority
of the Trust's or that Fund's outstanding shares.
No Fund may:
1. With respect to 75% of its total assets, (i) purchase securities of
any issuer (except securities issued or guaranteed by the United
States Government, its agencies or instrumentalities) if, as a result,
more than 5% of its total assets would be invested in the securities
of such issuer; or (ii) acquire more than 10% of the outstanding
voting securities of any one issuer. This restriction does not apply
to the International Fixed Income Fund.
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<PAGE> 23
2. Purchase any securities which would cause more than 25% of its total
assets to be invested in the securities of one or more issuers
conducting their principal business activities in the same industry,
provided that this limitation does not apply to investments in
securities issued or guaranteed by the United States Government, its
agencies or instrumentalities.
For purposes of the industry concentration limitation, specified in paragraph 2
above, (i) utility companies will be divided according to their services, for
example, gas, gas transmission, electric and telephone will each be considered
a separate industry; (ii) financial service companies will be classified
according to end users of their services, for example, automobile finance, bank
finance and diversified finance will each be considered a separate industry;
(iii) supranational agencies will be deemed to be issuers conducting their
principal business activities in the same industry; and (iv) governmental
issuers within a particular country will be deemed to be conducting their
principal business activities in the same industry.
The foregoing percentage limitations will apply at the time of the purchase of
a security. Additional fundamental and non-fundamental investment limitations
are set forth in the Statement of Additional Information.
PURCHASE AND REDEMPTION OF SHARES
===============================================================================
Shares of each Fund may be purchased or redeemed on days on which the New York
Stock Exchange is open for business (each, a "Business Day").
Shareholders who desire to purchase shares for cash must place their orders
with SFM prior to 4:00 p.m. Eastern time on any Business Day for the order to
be accepted on that Business Day. Cash investments must be transmitted or
delivered in federal funds to the wire agent on the next Business Day following
the day the order is placed. The Trust reserves the right to reject a purchase
order when the distributor determines that it is not in the best interest of
the Trust or its shareholders to accept such purchase order.
Purchases will be made in full and fractional shares of a Fund calculated to
three decimal places. The Trust will send shareholders a statement of shares
owned after each transaction. The purchase price of shares is the net asset
value next determined after a purchase order is received and accepted by the
Trust. The net asset value per share of each Fund is determined by dividing the
total market value of a Fund's investment and other assets, less any
liabilities, by the total number of outstanding shares of that Fund. Net asset
value per share is determined daily at the close of business of the New York
Stock Exchange (currently 4:00 p.m. Eastern time) on each Business Day.
The market value of each portfolio security is obtained by SFM from an
independent pricing service. Securities that have maturities of 60 days or
less at the time of purchase will be valued using the amortized cost method
(described in the Statement of Additional Information). The pricing service
relies primarily on prices of actual market transactions as well as trader
quotations. However, the pricing service may use a matrix system to determine
valuations of equity and fixed income securities. This system considers such
factors as security prices, yields, maturities, call features, ratings and
developments relating to specific securities in arriving at valuations. The
procedures used by the
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<PAGE> 24
pricing service and its valuations are reviewed by the officers of the Trust
under the general supervision of the Trustees.
Shares of a Fund may be purchased in exchange for securities included in the
Fund subject to SFM's determination that the securities are acceptable.
Securities accepted in an exchange will be valued at the market value. All
accrued interest and subscription of other rights which are reflected in the
market price of accepted securities at the time of valuation become the
property of the Trust and must be delivered by the Shareholder to the Trust
upon receipt from the issuer.
SFM will not accept securities for a Fund unless (1) such securities are
appropriate for the Fund at the time of the exchange; (2) such securities are
acquired for investment and not for resale; (3) the Shareholder represents and
agrees that all securities offered to the Trust for the Fund are not subject to
any restrictions upon their sale by the Fund under the Securities Act of 1933,
or otherwise; (4) such securities are traded on the American Stock Exchange,
the New York Stock Exchange or on NASDAQ in an unrelated transaction with a
quoted sales price on the same day the exchange valuation is made or, if not
listed on such exchanges or on NASDAQ, have prices available from an
independent pricing service approved by the Trust's Board of Trustees; and (5)
the securities may be acquired under the investment restrictions applicable to
the Fund.
Shareholders who desire to redeem shares of a Fund must place their redemption
orders with SFM prior to 4:00 p.m. Eastern time on any Business Day. The
redemption price is the net asset value per share of the Fund next determined
after receipt by SFM of the redemption order. Payment on redemption will be
made as promptly as possible and, in any event, within seven days after the
redemption order is received.
The Trust intends to generally make redemptions in cash. The Trust may,
however, make redemptions in whole or in part by a distribution in kind of
readily marketable securities in lieu of cash. Shareholders may incur
brokerage costs on the sale of any such securities so received in payment of
redemptions.
Purchase and redemption orders may be placed by telephone. Neither the Trust
nor SFM will be responsible for any loss, liability, cost or expense for acting
upon wire instructions or upon telephone instructions that it reasonably
believes to be genuine. The Trust and SFM will each employ reasonable
procedures to confirm that instructions communicated by telephone are genuine,
including requiring a form of personal identification prior to acting upon
instructions received by telephone and recording telephone instructions.
If market conditions are extraordinarily active, or other extraordinary
circumstances exist, and shareholders experience difficulties placing
redemption orders by telephone, shareholders may wish to consider placing their
order by other means.
PERFORMANCE
================================================================================
From time to time, a Fund may advertise yield and total return. These figures
will be based on historical earnings and are not intended to indicate future
performance. No representation can be made concerning actual yield or future
returns. The yield of a Fund refers to the annualized income
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<PAGE> 25
generated by an investment in the Fund over a specified 30-day period. The
yield is calculated by assuming that the same amount of income generated by the
investment during that period is generated in each 30-day period over one year
and is shown as a percentage of the investment.
The total return of a Fund refers to the average compounded rate of return on a
hypothetical investment for designated time periods, assuming that the entire
investment is redeemed at the end of each period and assuming the reinvestment
of all dividend and capital gain distributions.
A Fund may periodically compare its performance to that of other mutual funds
tracked by mutual fund rating services (such as Lipper Analytical), or by
financial and business publications and periodicals, broad groups of comparable
mutual funds, unmanaged indices which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs or
other investment alternatives. A Fund may quote Morningstar, Inc., a service
that ranks mutual funds on the basis of risk-adjusted performance. A Fund may
use long-term performance of these capital markets to demonstrate general
long-term risk versus reward scenarios and could include the value of a
hypothetical investment in any of the capital markets. A Fund may also quote
financial and business publications and periodicals as they relate to fund
management, investment philosophy and investment techniques.
A Fund may quote various measures of volatility and benchmark correlation in
advertising and may compare these measures to those of other funds. Measures
of volatility attempt to compare historical share price fluctuations or total
returns to a benchmark while measures of benchmark correlation indicate how
valid a comparative benchmark might be. Measures of volatility and correlation
are calculated using averages of historical data and cannot be calculated
precisely.
TAXES
================================================================================
The following summary of federal income tax consequences is based on current
tax laws and regulations, which may be changed by legislative, judicial or
administrative action. No attempt has been made to present a detailed
explanation of the federal, state or local tax treatment of the Funds or their
shareholders. Accordingly, shareholders are urged to consult their tax
advisers regarding specific questions as to federal, state and local taxes.
State and local tax consequences of an investment in a Fund may differ from the
federal income tax consequences described below. Additional information
concerning taxes is set forth in the Statement of Additional Information.
TAX STATUS OF THE FUNDS
Each Fund is treated as a separate entity for federal income tax purposes and
is not combined with the Trust's other funds. The Funds intend to qualify for
the special tax treatment afforded regulated investment companies ("RICs")
under Subchapter M of the Code so as to be relieved of federal income tax on
net investment company taxable income and net capital gains (the excess of net
long-term capital gain over net short-term capital losses) distributed to
shareholders.
TAX STATUS OF DISTRIBUTIONS
Each Fund distributes substantially all of its net investment income (including
net short-term capital gains) to shareholders. Dividends from a Fund's net
investment income are taxable to its shareholders as ordinary income (whether
received in cash or in additional shares). Distributions of net capital
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<PAGE> 26
gains are taxable to shareholders as long-term capital gains regardless of how
long the shareholder has held shares. Dividends and [capital gains]
distributions will not qualify for the corporate dividends-received deduction.
The Funds will provide annual reports to shareholders of the federal income tax
status of all distributions.
Dividends declared by a Fund in October, November or December of any year and
payable to shareholders of record on a date in such a month will be deemed to
have been paid by the Fund and received by the Shareholders on December 31 of
the year declared if paid by the Fund at any time during the following January.
Each Fund intends to make sufficient distributions to avoid liability for the
federal excise tax applicable to RICs.
Investment income received by the Funds from sources within foreign countries
may be subject to foreign income taxes withheld at the source. To the extent
that a Fund is liable for foreign income taxes so withheld, the Fund intends to
operate so as to meet the requirements of the Code to pass through to the
shareholders credit for foreign income taxes paid. Although the Funds intend
to meet Code requirements to pass through credit for such taxes, there can be
no assurance that the Funds will be able to do so.
Each sale, exchange or redemption of Fund shares is a taxable transaction to
the shareholder.
GENERAL INFORMATION
================================================================================
TRUSTEES OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees under
the laws of the Commonwealth of Massachusetts. The Trustees have approved
contracts under which, as described above, certain companies provide essential
management services to the Trust.
VOTING RIGHTS
Each share held entitles the shareholder of record to one vote. The
shareholders of each Fund will vote separately on matters pertaining solely to
that Fund, such as any distribution plan. As a Massachusetts business trust,
the Trust is not required to hold annual meetings of shareholders, but approval
will be sought for certain changes in the operation of the Trust and for the
election of Trustees under certain circumstances. In addition, a Trustee may
be removed by the remaining Trustees or by shareholders at a special meeting
called upon written request of shareholders owning at least 10% of the
outstanding shares of the Trust. In the event that such a meeting is requested,
the Trust will provide appropriate assistance and information to the
shareholders requesting the meeting.
REPORTING
The Trust issues an unaudited financial report semi-annually and audited
financial statements annually. The Trust furnishes proxy statements and other
reports to shareholders of record.
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<PAGE> 27
SHAREHOLDER INQUIRIES
Shareholder inquiries should be directed to SEI Financial Management
Corporation, 680 East Swedesford Road, Wayne, Pennsylvania 19087-1658.
DIVIDENDS
Substantially all of the net investment income (exclusive of capital gains) of
each Fund is periodically declared and paid as a dividend. Dividends currently
are paid periodically for the International Fixed Income, Emerging Markets
Equity and International Equity Funds and currently are paid on a monthly basis
for the Core Fixed Income and High Yield Bond Funds and currently are paid on a
quarterly basis for the Small Cap and Large Cap Funds. Currently, net capital
gains for all the Funds (the excess of net long-term capital gain over net
short-term capital loss) realized, if any, will be distributed at least
annually.
Shareholders automatically receive all income dividends and capital gains
distributions in additional shares at the net asset value next determined
following the record date, unless the shareholder has elected to take such
payment in cash. Shareholders may change their election by providing written
notice to SFM at least 15 days prior to the distribution.
Dividends and capital gains of each Fund are paid on a per-share basis. The
value of each share will be reduced by the amount of any such payment. If
shares are purchased shortly before the record date for a dividend or capital
gains distributions, a shareholder will pay the full price for the share and
receive some portion of the price back as a taxable dividend or distribution.
MASTER/FEEDER OPTION
The Trust may in the future seek to achieve any Fund's investment objective by
investing all of that Fund's assets in another investment company having the
same investment objective and substantially the same investment policies and
restrictions as those applicable to that Fund. It is expected that any such
investment company would be managed by SFM in substantially the same manner as
the existing Fund. The initial shareholder(s) of each Fund voted to vest such
authority in the sole discretion of the Trustees and such investment may be
made without further approval of the shareholders of the Funds. However,
shareholders of the Funds will be given at least 30 days' prior notice of any
such investment. Such investment would be made only if the Trustees determine
it to be in the best interests of a Fund and its shareholders. In making that
determination the Trustees will consider, among other things, the benefits to
shareholders and/or the opportunity to reduce costs and achieve operational
efficiencies. Although the Funds believe that the Trustees will not approve an
arrangement that is likely to result in higher costs, no assurance is given
that costs will be materially reduced if this option is implemented.
COUNSEL AND INDEPENDENT ACCOUNTANTS
Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Coopers & Lybrand
LLP serves as the independent accountants of the Trust.
CUSTODIAN
CoreStates Bank, N.A., Broad and Chestnut Streets, P.O. Box 7618, Philadelphia,
Pennsylvania 19101, acts as wire agent for each of the Funds and custodian for
the assets of the Large Cap, Small Cap, Core Fixed Income and High Yield Bond
Funds. State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, acts as custodian for the assets of the International
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<PAGE> 28
Fixed Income, Emerging Markets Equity and International Equity Funds.
CoreStates Bank, N.A. and State Street Bank and Trust Company (each a
"Custodian," and, together, the "Custodians") hold cash, securities and other
assets of the respective Funds for which they act as custodian as required by
the 1940 Act.
DESCRIPTION OF PERMITTED INVESTMENTS AND RISK FACTORS
================================================================================
The following is a description of the permitted investment practices for the
Funds, and the associated risk factors:
AMERICAN DEPOSITARY RECEIPTS ("ADRs"), EUROPEAN DEPOSITARY RECEIPTS ("EDRs")
and GLOBAL DEPOSITARY RECEIPTS ("GDRs") -- ADRs are securities, typically
issued by a U.S. financial institution (a "depositary"), that evidence
ownership interests in a security or a pool of securities issued by a foreign
issuer and deposited with the depositary. ADRs include American Depositary
Shares and New York Shares. EDRs, which are sometimes referred to as
Continental Depositary Receipts ("CDRs"), are securities, typically issued by a
non-U.S. financial institution, that evidence ownership interests in a security
or a pool of securities issued by either a U.S. or foreign issuer. GDRs are
issued globally and evidence a similar ownership arrangement. Generally, ADRs
are designed for trading in the U.S. securities market, EDRs are designed for
trading in European securities market and GDRs are designed for trading in
non-U.S. securities markets. ADRs, EDRs, CDRs and GDRs may be available for
investment through "sponsored" or "unsponsored" facilities. A sponsored
facility is established jointly by the issuer of the security underlying the
receipt and a depositary, whereas an unsponsored facility may be established by
a depositary without participation by the issuer of the receipt's underlying
security. Holders of an unsponsored depositary receipt generally bear all the
costs of the unsponsored facility. The depositary of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited security or to pass through to the
holders of the receipts voting rights with respect to the deposited securities.
ASSET-BACKED SECURITIES -- Asset-backed securities are secured by non-mortgage
assets such as company receivables, truck and auto loans, leases and credit
card receivables. Such securities are generally issued as pass-through
certificates, which represent undivided fractional ownership interests in the
underlying pools of assets. Such securities also may be debt instruments,
which are also known as collateralized obligations and are generally issued as
the debt of a special purpose entity, such as a trust, organized solely for the
purpose of owning such assets and issuing such debt. A Fund may invest in
other asset-backed securities that may be created in the future if the Money
Managers determine that they are suitable.
CONVERTIBLE SECURITIES -- Convertible securities are corporate securities that
are exchangeable for a set number of another security at a prestated price.
Convertible securities typically have characteristics similar to both fixed
income and equity securities. Because of the conversion feature, the market
value of a convertible security tends to move with the market value of the
underlying stock. The value of a convertible security is also affected by
prevailing interest rates, the credit quality of the issuer, and any call
provisions.
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<PAGE> 29
DEMAND INSTRUMENTS -- Certain instruments may entail a demand feature which
permits the holder to demand payment of the principal amount of the instrument.
Demand instruments include variable rate demand notes.
DERIVATIVES -- Derivatives are investments that derive their value from other
securities, assets or indices. The following may be considered derivative
securities: futures, options on futures, options (e.g., puts and calls), swap
agreements, mortgage-backed securities (e.g., CMOs, REMICs, IOs and POs),
when-issued securities and forward commitments, floating and variable rate
securities, convertible securities, "stripped" U.S. Treasury securities (e.g.,
receipts and STRIPs), privately issued stripped securities (e.g., TIGRs, TRs
and CATS). See elsewhere in this "Description of Permitted Investments and
Risk Factors" for discussions of these various instruments, and see "Investment
Objectives and Policies" for more information about any investment policies and
limitations applicable to their use.
EQUITY SECURITIES -- Equity securities represent ownership interests in a
company or corporation and consist of common stock, preferred stock, warrants
and other rights to acquire such instruments. Equity securities may be listed
on exchanges or traded in the over-the-counter market. Investments in common
stocks are subject to market risks which may cause their prices to fluctuate
over time. The value of convertible securities is also affected by prevailing
interest rates, the credit quality of the issuer and any call provisions.
Changes in the value of fund securities will not necessarily affect cash income
derived from these securities, but will affect a Fund's net asset value.
Investments in the equity securities of small capitalization companies involves
greater risk than is customarily associated with larger, more established
companies due to the greater business risks of small size, limited markets and
financial resources, narrow product lines and the frequent lack of depth of
management. The securities of small companies are often traded
over-the-counter and may not be traded in volumes typical on a national
securities exchange. Consequently, the securities of smaller companies may
have limited market stability and may be subject to more abrupt or erratic
market movements than securities of larger, more established growth companies
or the market averages in general.
FIXED INCOME SECURITIES -- Fixed income securities are debt obligations issued
by corporations, municipalities and other borrowers. The market value of fixed
income investments will generally change in response to interest rate changes
and other factors. During periods of falling interest rates, the values of
outstanding fixed income securities generally rise. Conversely, during periods
of rising interest rates, the values of such securities generally decline.
Moreover, while securities with longer maturities tend to produce higher
yields, the prices of longer maturity securities are also subject to greater
market fluctuations as a result of changes in interest rates. Changes by
recognized agencies in the rating of any fixed income security and in the
ability of an issuer to make payments of interest and principal will also
affect the value of these investments. Changes in the value of portfolio
securities will not affect cash income derived from these securities, but will
affect a Fund's net asset value. Please also see other definitions in this
section that describe specific types of fixed income securities in greater
detail, including "Asset-Backed Securities," "Mortgage-Backed Securities,"
"U.S. Government Agencies," "U.S. Treasury Obligations," and "Yankee
Obligations."
FORWARD FOREIGN CURRENCY CONTRACTS -- A forward contract involves an obligation
to purchase or sell a specific currency amount at a future date, agreed upon by
the parties, at a price set
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at the time of the contract. A Fund may also enter into a contract to sell,
for a fixed amount of U.S. dollars or other appropriate currency, the amount of
foreign currency approximating the value of some or all of the Fund's
securities denominated in such foreign currency.
At the maturity of a forward contract, the Fund may either sell a fund security
and make delivery of the foreign currency, or it may retain the security and
terminate its contractual obligation to deliver the foreign currency by
purchasing an "offsetting" contract with the same currency trader, obligating
it to purchase, on the same maturity date, the same amount of the foreign
currency. The Fund may realize a gain or loss from currency transactions.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- Futures contracts provide
for the future sale by one party and purchase by another party of a specified
amount of a specific security at a specified future time and at a specified
price. An option on a futures contract gives the purchaser the right, in
exchange for a premium, to assume a position in a futures contract at a
specified exercise price during the term of the option. A Fund may use futures
contracts and related options for bona fide hedging purposes, to offset changes
in the value of securities held or expected to be acquired or be disposed of,
to minimize fluctuations in foreign currencies, or to gain exposure to a
particular market or instrument. A Fund will minimize the risk that it will be
unable to close out a futures contract by only entering into futures contracts
which are traded on national futures exchanges. In addition, a Fund will sell
only covered futures contracts and options on futures contracts.
Stock and bond index futures are futures contracts for various stock and bond
indices that are traded on registered securities exchanges. A stock or bond
index futures contract obligates the seller to deliver (and the purchaser to
take) an amount of cash equal to a specific dollar amount times the difference
between the value of a specific stock or bond index at the close of the last
trading day of the contract and the price at which the agreement is made.
Stock and bond index futures contracts are bilateral agreements pursuant to
which two parties agree to take or make delivery of an amount of cash equal to
a specified dollar amount times the difference between the stock or bond index
value at the close of trading of the contract and the price at which the
futures contract is originally struck. No physical delivery of the stocks or
bonds comprising the particular index is made; generally contracts are closed
out prior to the expiration date of the contracts. No price is paid upon
entering into futures contracts. Instead, a Fund would be required to deposit
an amount of cash or U.S. Treasury securities known as "initial margin."
Subsequent payments, called "variation margin," to and from the broker, would
be made on a daily basis as the value of the futures position varies (a process
known as "marking to market"). The margin is in the nature of a performance
bond or good-faith deposit on a futures contract.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate (LIBOR), although
foreign currency denominated instruments are available from time to time.
Eurodollar futures contracts enable purchasers to obtain a fixed rate for the
lending of funds and sellers to obtain a fixed rate for borrowings.
There are risks associated with these activities, including the following: (1)
the success of a hedging strategy may depend on an ability to predict movements
in the prices of individual securities, fluctuations in markets and movements
in interest rates, (2) there may be an imperfect or no
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<PAGE> 31
correlation between the changes in market value of the securities held by the
Fund and the prices of futures and options on futures, (3) there may not be a
liquid secondary market for a futures contract or option, (4) trading
restrictions or limitations may be imposed by an exchange, and (5) government
regulations may restrict trading in futures contracts and futures options.
A Fund may enter into futures contracts and options on futures contracts traded
on an exchange regulated by the Commodities Futures Trading Commission
("CFTC"), as long as, to the extent that such transactions are not for "bona
fide hedging purposes," the aggregate initial margin and premiums on such
positions (excluding the amount by which such options are in the money) do not
exceed 5% of a Fund's net assets. A Fund may buy and sell futures contracts
and related options to manage its exposure to changing interest rates and
securities prices. Some strategies reduce a Fund's exposure to price
fluctuations, while others tend to increase its market exposure. Futures and
options on futures can be volatile instruments and involve certain risks that
could negatively impact a Fund's return.
In order to avoid leveraging and related risks, when a Fund purchases futures
contracts, it will collateralize its position by depositing an amount of cash
or liquid high-grade debt securities, equal to the market value of the futures
positions held, less margin deposits, in a segregated account its custodian.
Collateral equal to the current market value of the futures position will be
marked to market on a daily basis.
ILLIQUID SECURITIES -- Illiquid securities are securities that cannot be
disposed of within seven business days at approximately the price at which they
are being carried on the Fund's books. Illiquid securities include demand
instruments with a demand notice period exceeding seven days, securities for
which there is no secondary market, and repurchase agreements with durations
over 7 days in length.
INVESTMENT COMPANIES -- Because of restrictions on direct investment by U.S.
entities in certain countries, investment in other investment companies may be
the most practical or only manner in which an international and global fund can
invest in the securities markets of those countries. A Fund does not intend to
invest in other investment companies unless, in the judgment of its Money
Managers, the potential benefits of such investments exceed the associated
costs relative to the benefits and costs associated with direct investments in
the underlying securities.
Investments in closed-end investment companies may involve the payment of
substantial premiums above the net asset value of such issuers' fund
securities, and are subject to limitations under the 1940 Act. As a
shareholder in an investment company, a Fund would bear its ratable share of
that investment company's expenses, including its advisory and administration
fees.
MONEY MARKET SECURITIES -- Money market securities are high-quality, short-term
debt instruments. They consist of: (i) bankers' acceptances, certificates of
deposits, notes and time deposits of highly-rated U.S. and foreign banks; (ii)
U.S. Treasury obligations and obligations issued or guaranteed by the agencies
and instrumentalities of the U.S. Government; (iii) high-quality commercial
paper issued by U.S. and foreign corporations; (iv) debt obligations with a
maturity of one year or less issued by corporations with outstanding
high-quality commercial paper; (v) repurchase agreements involving any of the
foregoing obligations entered into with highly-rated banks and broker-dealers;
and (vi) foreign government obligations.
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<PAGE> 32
MORTGAGE-BACKED SECURITIES -- Mortgage-backed securities are instruments that
entitle the holder to a share of all interest and principal payments from
mortgages underlying the security. The mortgages backing these securities
include conventional fifteen and thirty-year fixed-rate mortgages, graduated
payment mortgages, adjustable rate mortgages and balloon mortgages. During
periods of declining interest rates, prepayment of mortgages underlying
mortgage-backed securities can be expected to accelerate. Prepayment of
mortgages which underlie securities purchased at a premium often results in
capital losses, while prepayment of mortgages purchased at a discount often
results in capital gains. Because of these unpredictable prepayment
characteristics, it is often not possible to predict accurately the average
life or realized yield of a particular issue.
Government Pass-Through Securities: These are securities that are issued or
guaranteed by a U.S. Government agency representing an interest in a pool of
mortgage loans. The primary issuers or guarantors of these mortgage-backed
securities are the Government National Mortgage Association ("GNMA"), the
Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Company ("FHLMC"). FNMA and FHLMC obligations are not backed by the
full faith and credit of the U.S. Government as GNMA certificates are, but FNMA
and FHLMC securities are supported by the instrumentalities' right to borrow
from the U.S. Treasury. GNMA, FNMA and FHLMC each guarantees timely
distributions of interest to certificate holders. GNMA and FNMA also each
guarantees timely distributions of scheduled principal.
Private Pass-Through Securities: These are mortgage-backed securities issued
by a non-governmental entity, such as a trust. These securities include
collateralized mortgage obligations ("CMOs") and real estate mortgage
investment conduits ("REMICs") that are rated in one of the top two rating
categories. While they are generally structured with one or more types of
credit enhancement, private pass-through securities typically lack a guarantee
by an entity having the credit status of a governmental agency or
instrumentality.
Commercial Mortgage-Backed Securities ("CMBS"): CMBS are generally multi-class
or pass-through securities backed by a mortgage loan or a pool of mortgage
loans secured by commercial property, such as industrial and warehouse
properties, office buildings, retail space and shopping malls, multifamily
properties and cooperative apartments. The commercial mortgage loans that
underlie CMBS have certain distinct characteristics. Commercial mortgage loans
are generally not amortizing or not fully amortizing. That is, at their
maturity date, repayment of the remaining principal balance or "balloon" is due
and is repaid through the attainment of an additional loan of sale of the
property. Unlike most single family residential mortgages, commercial real
estate property loans often contain provisions which substantially reduce the
likelihood that such securities will be prepaid. The provisions generally
impose significant prepayment penalties on loans and, in some cases there may
be prohibitions on principal prepayments for several years following
origination.
Collateralized Mortgage Obligations ("CMOs"): CMOs are debt obligations or
multiclass pass-through certificates issued by agencies or instrumentalities of
the U.S. Government or by private originators or investors in mortgage loans.
In a CMO, series of bonds or certificates are usually issued in multiple
classes. Principal and interest paid on the underlying mortgage assets may be
allocated among the several classes of a series of a CMO in a variety of ways.
Principal payments on the underlying mortgage assets may cause CMOs to be
retired substantially earlier then their stated maturities or final
distribution dates, resulting in a loss of all or part of any premium paid.
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REMICs: A REMIC is a CMO that qualifies for special tax treatment under the
Code and invests in certain mortgages principally secured by interests in real
property. Investors may purchase beneficial interests in REMICs, which are
known as "regular" interests, or "residual" interests. Guaranteed REMIC
pass-through certificates ("REMIC Certificates") issued by FNMA or FHLMC
represent beneficial ownership interests in a REMIC trust consisting
principally of mortgage loans or FNMA, FHLMC or GNMA-guaranteed mortgage
pass-through certificates. For FHLMC REMIC Certificates, FHLMC guarantees the
timely payment of interest, and also guarantees the payment of principal as
payments are required to be made on the underlying mortgage participation
certificates.
Stripped Mortgage-Backed Securities ("SMBs"): SMBs are usually structured with
two classes that receive specified proportions of the monthly interest and
principal payments from a pool of mortgage securities. One class may receive
all of the interest payments and is thus termed an interest-only class ("IO"),
while the other class may receive all of the principal payments and is thus
termed the principal-only class ("PO"). The value of IOs tends to increase as
rates rise and decrease as rates fall; the opposite is true of POs. SMBs are
extremely sensitive to changes in interest rates because of the impact thereon
of prepayment of principal on the underlying mortgage securities can experience
wide swings in value in response to changes in interest rates and associated
mortgage prepayment rates. During times when interest rates are experiencing
fluctuations, such securities can be difficult to price on a consistent basis.
The market for SMBs is not as fully developed as other markets; SMBs therefore
may be illiquid.
MORTGAGE DOLLAR ROLLS -- Mortgage "dollar rolls" are transactions in which
mortgage-backed securities are sold for delivery in the current month and the
seller simultaneously contracts to repurchase substantially similar securities
on a specified future date. Any difference between the sale price and the
purchase price is netted against the interest income foregone on the securities
sold to arrive at an implied borrowing rate. Alternatively, the sale and
purchase transactions can be executed at the same price, with the Fund being
paid a fee as consideration for entering into the commitment to purchase.
Mortgage dollar rolls may be renewed prior to cash settlement and initially may
involve only a firm commitment agreement by the Fund to buy a security. If the
broker-dealer to whom the Fund sells the security becomes insolvent, the Fund's
right to repurchase the security may be restricted. Other risks involved in
entering into mortgage dollar rolls include the risk that the value of the
security may change adversely over the term of the mortgage dollar roll and
that the security the Fund is required to repurchase may be worth less than the
security that the Fund originally held.
To avoid any leveraging concerns, the Fund will place U.S. Government or other
liquid, high grade debt securities in a segregated account in an amount
sufficient to cover its repurchase obligation.
OBLIGATIONS OF SUPRANATIONAL ENTITIES -- Supranational entities are entities
established through the joint participation of several governments, and include
the Asian Development Bank, the Inter-American Development Bank, International
Bank for Reconstruction and Development (World Bank), African Development Bank,
European Economic Community, European Investment Bank and the Nordic Investment
Bank. The governmental members, or "stockholders," usually make initial
capital contributions to the supranational entity and, in many cases, are
committed to make additional capital contributions if the supranational entity
is unable to repay its borrowings.
OPTIONS -- A put option gives the purchaser of the option the right to sell,
and the writer of the option the obligation to buy, the underlying commodity or
index at any time during the option period.
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A call option gives the purchaser of the option the right to buy, and the
writer of the option the obligation to sell, the underlying security at any
time during the option period. The initial purchase (sale) of an option
contract is an "opening transaction." In order to close out an option
position, a Fund may enter into a "closing transaction," which is simply the
sale (purchase) of an option contract on the same security with the same
exercise price and expiration date as the option contract originally opened.
If a Fund is unable to effect a closing purchase transaction with respect to an
option it has written, it will not be able to sell the underlying security
until the option expires or the Fund delivers the security upon exercise.
A Fund may purchase put and call options on securities to protect against a
decline in the market value of the securities in its portfolio or to anticipate
an increase in the market value of securities that the Fund may seek to
purchase in the future. A Fund purchasing put and call options pays a premium
therefor. The premium paid to the writer is the consideration for undertaking
the obligations under the option contract. If price movements in the
underlying securities are such that exercise of the options would not be
profitable for the Fund, loss of the premium paid may be offset by an increase
in the value of the Fund's securities or by a decrease in the cost of
acquisition of securities by the Fund.
A Fund may write covered call options on securities as a means of increasing
the yield on its fund and as a means of providing limited protection against
decreases in its market value. When a Fund writes an option, if the underlying
securities do not increase or decrease to a price level that would make the
exercise of the option profitable to the holder thereof, the option generally
will expire without being exercised and the Fund will realize as profit the
premium received for such option. When a call option of which a Fund is the
writer is exercised, the Fund will be required to sell the underlying
securities to the option holder at the strike price, and will not participate
in any increase in the price of such securities above the strike price. When a
put option of which a Fund is the writer is exercised, the Fund will be
required to purchase the underlying securities at a price in excess of the
market value of such securities.
A Fund that may invest in the securities of a foreign issuer may also purchase
and write put and call options on foreign currencies to manage its exposure to
exchange rates. Call options on foreign currency written by a Fund will be
"covered," which means that the Fund will own an equal amount of the underlying
foreign currency. With respect to put options on foreign currency written by a
Fund, the Fund will establish a segregated account with its custodian bank
consisting of cash or liquid high-grade debt securities in an amount equal to
the amount the Fund would be required to pay upon exercise of the put.
Additionally, a Fund may purchase and write put and call options on indices and
enter into related closing transactions. Options on an index give the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the underlying index is greater than (or less than, in the
case of puts) the exercise price of the option. Alternatively, a Fund may
choose to terminate an option position by entering into a closing transaction.
All settlements are in cash, and gain or loss depends on price movements in the
particular market represented by the index generally, rather than the price
movements in individual securities. All options written on indices must be
covered. When a Fund writes an option on an index, it will establish a
segregated account containing cash or liquid high-grade debt securities with
its Custodian in an amount at least equal to the market value of the option,
and will maintain the account while the option is open or will otherwise cover
the transaction. This amount of cash is equal to the difference between the
closing price of the index and the exercise
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price of the option, expressed in dollars multiplied by a specified number.
Thus, unlike options on individual securities, the ability of a Fund to enter
into closing transactions depends upon the existence of a liquid secondary
market for such transactions.
A Fund may purchase and write options on an exchange or over-the-counter.
Over-the-counter options ("OTC options") differ from exchange-traded options in
several respects. They are transacted directly with dealers and not with a
clearing corporation, and therefore entail the risk of non-performance by the
dealer. OTC options are available for a greater variety of securities and for
a wider range of expiration dates and exercise prices than are available for
exchange-traded options. Because OTC options are not traded on an exchange,
pricing is done normally by reference to information from a market maker. It
is the position of the SEC that OTC options are generally illiquid.
Risk Factors. Risks associated with options transactions include: (1) the
success of a hedging strategy may depend on an ability to predict movements in
the prices of individual securities, fluctuations in markets and movements in
interest rates; (2) there may be an imperfect correlation between the movement
in prices of options and the securities underlying them; (3) there may not be a
liquid secondary market for options; and (4) while a Fund will receive a
premium when it writes covered call options, it may not participate fully in a
rise in the market value of the underlying security.
PRIVATIZATIONS -- Privatizations are foreign government programs for selling
all or part of the interests in government owned or controlled enterprises.
The ability of a U.S. entity to participate in privatizations in certain
foreign countries may be limited by local law, or the terms on which the Fund
may be permitted to participate may be less advantageous than those applicable
for local investors. There can be no assurance that foreign governments will
continue to sell their interests in companies currently owned or controlled by
them or that privatization programs will be successful.
PAY-IN-KIND BONDS -- Investments of a Fund in fixed income securities may
include pay-in-kind bonds. These are securities which pay interest in either
cash or additional securities, at the issuer's option, for a specified period.
Pay-in-kind bonds, like zero coupon bonds, are designed to give an issuer
flexibility in managing cash flow. Pay-in-kind bonds are expected to reflect
the market value of the underlying debt plus an amount representing accrued
interest since the last payment. Pay-in-kind bonds are usually less volatile
than zero coupon bonds, but more volatile than cash pay securities.
RECEIPTS -- Receipts are sold as zero coupon securities which means that they
are sold at a substantial discount and redeemed at face value at their maturity
date without interim cash payments of interest or principal. This discount is
accreted over the life of the security, and such accretion will constitute the
income earned on the security for both accounting and tax purposes. Because of
these features, such securities may be subject to greater interest rate
volatility than interest paying fixed income securities. See also "Taxes."
REITs -- REITs are trusts that invest primarily in commercial real estate or
real estate-related loans. The value of interests in REITs may be affected by
the value of the property owned or the quality of the mortgages held by the
trust.
REPURCHASE AGREEMENTS -- arrangements by which a Fund obtains a security and
simultaneously commits to return the security to the seller at an agreed upon
price (including principal and interest) on an agreed upon date within a number
of days from the date of purchase. A Custodian
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or its agent will hold the security as collateral for the repurchase agreement.
Collateral must be maintained at a value at least equal to 102% of the purchase
price. A Fund bears a risk of loss in the event the other party defaults on
its obligations and the Fund is delayed or prevented from its right to dispose
of the collateral securities or if the Fund realizes a loss on the sale of the
collateral securities. A Fund's Money Managers will enter into repurchase
agreements on behalf of the Fund only with financial institutions deemed to
present minimal risk of bankruptcy during the term of the agreement based on
guidelines established and periodically reviewed by the Trustees. Repurchase
agreements are considered loans under the 1940 Act.
SECURITIES LENDING -- In order to generate additional income, a Fund may lend
securities that it owns pursuant to agreements requiring that the loan be
continuously secured by collateral consisting of cash, securities of the U.S.
Government or its agencies equal to at least 100% of the market value of the
securities lent. A Fund continues to receive interest on the securities lent
while simultaneously earning interest on the investment of cash collateral.
Collateral is marked to market daily. There may be risks of delay in recovery
of the securities or even loss of rights in the collateral should the borrower
of the securities fail financially or become insolvent.
SECURITIES OF FOREIGN ISSUERS -- There are certain risks connected with
investing in foreign securities. These include risks of adverse political and
economic developments (including possible governmental seizure or
nationalization of assets), the possible imposition of exchange controls or
other governmental restrictions, less uniformity in accounting and reporting
requirements, the possibility that there will be less information on such
securities and their issuers available to the public, the difficulty of
obtaining or enforcing court judgments abroad, restrictions on foreign
investments in other jurisdictions, difficulties in effecting repatriation of
capital invested abroad and difficulties in transaction settlements and the
effect of delay on shareholder equity. Foreign securities may be subject to
foreign taxes, and may be less marketable than comparable U.S. securities. The
value of a Fund's investments denominated in foreign currencies will depend on
the relative strengths of those currencies and the U.S. dollars, and a Fund may
be affected favorably or unfavorably by changes in the exchange rates or
exchange control regulations between foreign currencies and the U.S. dollar.
Changes in foreign currency exchange rates also may affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains if any, to be distributed to
shareholders by a Fund. Furthermore, emerging market countries may have less
stable political environments than more developed countries. Also it may be
more difficult to obtain a judgment in a court outside the United States.
SHORT SALES -- Selling securities short involves selling securities the Fund
does not own (but has borrowed) in anticipation of a decline in the market
price of such securities. To deliver the securities to the buyer, the seller
must arrange through a broker to borrow the securities and, in so doing, the
seller becomes obligated to replace the securities borrowed at their market
price at the time of replacement. In a short sale, the proceeds the seller
receives from the sale are retained by a broker until the seller replaces the
borrowed securities. The seller may have to pay a premium to borrow the
securities and must pay any dividends or interest payable on the securities
until they are replaced.
A Fund may only sell securities short "against the box." A short sale is
"against the box" if, at all times during which the short position is open, the
Fund owns at least an equal amount of the securities or securities convertible
into, or exchangeable without further consideration for, securities of the same
issue as the securities that are sold short.
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The Fund may also maintain "short" positions in forward currency exchange
transactions, which involve the Fund's agreement to exchange currency that it
does not own at that time for another currency at a future date and specified
price in anticipation of a decline in the value of the currency sold short
relative to the currency that the Fund has contracted to receive in the
exchange. To ensure that any short position of the Fund is not used to achieve
leverage, the Fund establishes with its Custodian a segregated account
consisting of cash or liquid, high grade debt securities equal to the
fluctuating market value of the currency as to which any short position is
being maintained.
SWAPS, CAPS, FLOORS AND COLLARS -- Interest rate swaps, mortgage swaps,
currency swaps and other types of swap agreements such as caps, floors and
collars are designed to permit the purchaser to preserve a return or spread on
a particular investment or portion of its portfolio, and to protect against any
increase in the price of securities a Fund anticipates purchasing at a later
date. In a typical interest rate swap, one party agrees to make regular
payments equal to a floating interest rate times a "notional principal amount,"
in return for payments equal to a fixed rate times the same amount, for a
specific period of time. Swaps may also depend on other prices or rates, such
as the value of an index or mortgage prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. Swap agreements will tend to shift a Fund's investment exposure
from one type of investment to another. Depending on how they are used, swap
agreements may increase or decrease the overall volatility of the Fund's
investments and their share price or yield.
U.S. GOVERNMENT AGENCY SECURITIES -- Obligations issued or guaranteed by
agencies of the U.S. Government, including, among others, the Federal Farm
Credit Bank, the Federal Housing Administration and the Small Business
Administration, and obligations issued or guaranteed by instrumentalities of
the U.S. Government, including, among others, the FHLMC, the Federal Land Banks
and the U.S. Postal Service. Some of these securities are supported by the
full faith and credit of the U.S. Treasury (e.g., GNMA securities), others are
supported by the right of the issuer to borrow from the Treasury (e.g., Federal
Farm Credit Bank securities), while still others are supported only by the
credit of the instrumentality (e.g., FNMA securities). Guarantees of principal
by agencies or instrumentalities of the U.S. Government may be a guarantee of
payment at the maturity of the obligation so that in the event of a default
prior to maturity there might not be a market and thus no means of realizing on
the obligation prior to maturity. Guarantees as to the timely payment of
principal and interest do not extend to the value or yield of these securities
or to the value of a Fund's shares.
U.S. TREASURY OBLIGATIONS -- U.S. Treasury obligations consist of bills, notes
and bonds issued by the U.S. Treasury as well as separately traded interest and
principal component parts of such obligations that are transferable through the
Federal book-entry Principal Securities ("STRIPS").
U.S. TREASURY RECEIPTS -- U.S. Treasury receipts are interests in separately
traded interest and principal component parts of U.S. Treasury obligations that
are issued by banks or brokerage firms and are created by depositing U.S.
Treasury notes and obligations into a special account at a custodian bank. The
custodian holds the interest and principal payments for the benefit of the
registered owners of the certificates of receipts. The custodian arranges for
the issuance of the certificates or receipts evidencing ownership and maintains
the register. Receipts include "Treasury Receipts" ("TRs"),
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"Treasury Investment Growth Receipts" ("TIGRs"), "Liquid Yield Option Notes"
("LYONs") and "Certificates of Accrual on Treasury Securities" ("CATS").
TIGRs, LYONS and CATS are interests in private proprietary accounts while TRs
and STRIPS are interest in accounts sponsored by the U.S. Treasury.
VARIABLE AND FLOATING RATE INSTRUMENTS -- Certain obligations may carry
variable or floating rates of interest, and may involve a conditional or
unconditional demand feature. Such instruments bear interest at rates that are
not fixed, but which vary with changes in specified market rates or indices.
The interest rates on these securities may be reset daily, weekly, quarterly or
some other reset period, and may have a floor or ceiling on interest rate
changes. There is a risk that the current interest rate on such obligations
may not accurately reflect existing market interest rates. A demand instrument
with a demand notice exceeding seven days may be considered illiquid if there
is no secondary market for such security.
WARRANTS -- Warrants are instruments giving holders the right, but not the
obligation, to buy equity or fixed income securities of a company at a given
price during a specified period.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES, INCLUDING TBA MORTGAGE-BACKED
SECURITIES -- When-issued or delayed delivery basis transactions involve the
purchase of an instrument with payment and delivery taking place in the future.
Delivery of and payment for these securities may occur a month or more after
the date of the purchase commitment. A Fund will maintain with its Custodian a
separate account with liquid high-grade debt securities or cash in an amount at
least equal to these commitments. The interest rate realized on these
securities is fixed as of the purchase date, and no interest accrues to a Fund
before settlement. These securities are subject to market fluctuation due to
changes in market interest rates, and it is possible that the market value at
the time of settlement could be higher or lower than the purchase price if the
general level of interest rates has changed. Although a Fund generally
purchases securities on a when-issued or forward commitment basis with the
intention of actually acquiring securities, a Fund may dispose of a when-issued
security or forward commitment prior to settlement if it deems it appropriate
to do so. When investing in when-issued securities, a Fund will not accrue
income until delivery of the securities and will invest in such securities only
for purposes of actually acquiring the securities and not for purposes of
leveraging.
One form of when-issued or delayed-delivery security that a Portfolio may
purchase is a "to be announced" ("TBA") mortgage-backed security. A TBA
mortgage-backed security transaction arises when a mortgage-backed security,
such as a GNMA pass-through security, is purchased or sold with specific pools
that will constitute that GNMA pass-through security to be announced on a
future settlement date.
YANKEE OBLIGATIONS -- Yankee obligations ("Yankees") are U.S.
dollar-denominated instruments of foreign issuers who either register with the
SEC or issue under Rule 144A under the Securities Act of 1933, as amended.
These obligations consist of debt securities (including preferred or preference
stock of non-governmental issuers), certificates of deposit, fixed time
deposits and bankers' acceptances issued by foreign banks, and debt obligations
of foreign governments or their subdivisions, agencies and instrumentalities,
international agencies and supranational entities. Some securities issued by
foreign governments or their subdivisions, agencies and instrumentalities may
not be backed by the full faith and credit of the foreign government.
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Investing in the securities of issuers based in any foreign country involves
special risks and considerations not typically associated with investing in
U.S. companies. These include risks resulting from differences in accounting,
auditing and financial reporting standards, lower liquidity than U.S. fixed
income or debt securities, the possibility of nationalization, expropriation or
confiscatory taxation; adverse changes in investment or exchange control
regulations and political instability. There may be less publicly available
information concerning foreign issuers of securities held by the Fund than is
available concerning U.S. issuers. Purchases and sales of foreign securities
and dividends and interest payable on those securities may be subject to
foreign taxes and taxes may be withheld from dividend and interest payments on
those securities. Foreign securities often trade with less frequency and
volume than domestic securities and therefore may exhibit greater price
volatility and a greater risk of liquidity.
The Yankee obligations selected for a Fund will adhere to the same quality
standards as those utilized for the selection of domestic debt obligations.
ZERO COUPON, PAY-IN-KIND AND DEFERRED PAYMENT SECURITIES -- Zero coupon
securities are securities that are sold at a discount to par value, and
securities on which interest payments are not made during the life of the
security. Upon maturity, the holder is entitled to receive the par value of
the security. While interest payments are not made on such securities, holders
of such securities are deemed to have received "phantom income" annually.
Because a Fund will distribute its "phantom income" to shareholders, to the
extent that shareholders elect to receive dividends in cash rather than
reinvesting such dividends in additional shares, the Fund will have fewer
assets with which to purchase income producing securities. Alternatively,
shareholders may have to redeem shares to pay tax on this "phantom income." In
either case, a Fund may have to dispose of its fund securities under
disadvantageous circumstances to generate cash, or may have to leverage itself
by borrowing cash to satisfy distribution requirements. A Fund accrues income
with respect to the securities prior to the receipt of cash payments.
Pay-in-kind securities are securities that have interest payable by delivery of
additional securities. Upon maturity, the holder is entitled to receive the
aggregate par value of the securities. Deferred payment securities are
securities that remain zero coupon securities until a predetermined date, at
which time the stated coupon rate becomes effective and interest becomes
payable at regular intervals. Zero coupon, pay-in-kind and deferred payment
securities may be subject to greater fluctuation in value and lesser liquidity
in the event of adverse market conditions than comparably rated securities
paying cash interest at regular interest payment periods.
Additional information on permitted investments and risk factors can be found
in the Statement of Additional Information.
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APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS
DESCRIPTION OF MOODY'S LONG-TERM RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the Aaa
securities.
A Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
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Moody's bond ratings, where specified, are applied to senior bank obligations
and insurance company senior policyholder and claims obligations with an
original maturity in excess of one year. Obligations relying upon support
mechanisms such as letters-of-credit and bonds of indemnity are excluded unless
explicitly rated.
Obligations of a branch of a bank are considered to be domiciled in the country
in which the branch is located. Unless noted as an exception, Moody's rating
on a bank's ability to repay senior obligations extends only to branches
located in countries which carry a Moody's sovereign rating. Such branch
obligations are rated at the lower of the bank's rating or Moody's sovereign
rating for the bank deposits for the country in which the branch is located.
When the currency in which an obligation is denominated is not the same as the
currency of the country in which the obligation is domiciled, Moody's ratings
do not incorporate an opinion as to whether payment of the obligation will be
affected by the actions of the government controlling the currency of
denomination. In addition, risk associated with bilateral conflicts between an
investor's home country and either the issuer's home country or the country
where an issuer branch is located are not incorporated into Moody's ratings.
Moody's makes no representation that rated bank obligations or insurance
company obligations are exempt from registration under the U.S. Securities Act
of 1933 or issued in conformity with any other applicable law or regulation.
Nor does Moody's represent that any specific bank or insurance company
obligation is legally enforceable or is a valid senior obligation of a rated
issuer.
Moody's ratings are opinions, not recommendations to buy or sell, and their
accuracy is not guaranteed. A rating should be weighed solely as one factor in
an investment decision and you should make your own study and evaluation of any
issuer whose securities or debt obligations you consider buying or selling.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF STANDARD & POOR'S LONG-TERM RATINGS
INVESTMENT GRADE
AAA Debt rated 'AAA' has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated debt only in small
degree.
A Debt rated 'A' has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to adverse effects
of changes in circumstances and economic conditions than debt in
higher-rated categories.
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BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
SPECULATIVE GRADE
Debt rated 'BB', 'B', 'CCC', 'CC', and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least degree of speculation
and 'C' the highest degree of speculation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties
or exposure to adverse business, financial, or economic conditions
that could lead to inadequate capacity to meet timely interest and
principal payments. The 'BB' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied
'BBB-' rating.
B Debt rate 'B' has greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions would likely
impair capacity or willingness to pay interest and repay principal.
The 'B' rating category also is used for debt subordinated to senior
debt that is assigned an actual or implied 'BB' or 'BB-' rating.
CCC Debt rated 'CCC' has a current identifiable vulnerability to default,
and is dependent on favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial, or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal. The 'CCC' rating category also is used for debt
subordinated to senior debt that is assigned an actual or implied 'B'
or 'B-' rating.
CC The rating 'CC' is typically applied to debt subordinated to senior
debt which is assigned an actual or implied 'CCC' rating.
C The rating 'C' is typically applied to debt subordinated to senior
debt which is assigned an actual or implied 'CCC-' debt rating. The
'C' rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
CI Debt rated 'CI' is reserved for income bonds on which no interest is
being paid.
D Debt is rated 'D' when the issue is in payment default, or the obligor
has filed for bankruptcy. The 'D' rating is used when interest or
principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
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Plus (+) or minus (-): The ratings from 'AA' to 'CCC' may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
DESCRIPTION OF DUFF & PHELPS' LONG-TERM DEBT RATINGS
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong. Risk is modest
AA- but may vary slightly from time to time because of economic
conditions.
A+ Protection factors are average but adequate. However, risk factors
A- are more variable and greater in periods of economic stress.
BBB+ Below average protection factors but still considered sufficient for
BBB- prudent investment. Considerable variability in risk during economic
cycles.
BB+ Below investment grade but deemed likely to meet obligations when due.
BB Present or prospective financial protection factors fluctuate
BB- according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.
B+ Below investment grade and possessing risk that obligations will not
B be met when due. Financial protection factors will fluctuate widely
B- according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC Well below investment grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial
with unfavorable economic/industry conditions, and/or with unfavorable
company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP Preferred stock with dividend arrearages.
DESCRIPTION OF FITCH'S LONG-TERM RATINGS
INVESTMENT GRADE BOND
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated 'AAA'.
Because bonds rated in the 'AAA' and 'AA' categories are not
significantly
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vulnerable to foreseeable future developments, short-term debt of
these issuers is generally rated 'F-1+'.
A Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on
these bonds, and therefore impair timely payment. The likelihood that
the ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
SPECULATIVE GRADE BOND
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified which could assist the obligor in satisfying its debt
service requirements.
B Bonds are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and
should be valued on the basis of their ultimate
recovery value in liquidation or reorganization of
the obligor. 'DDD' represents the highest potential
for recovery on these bonds, and 'D' represents the
lowest potential for recovery.
PLUS (+) MINUS (-) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the
rating category. Plus and minus signs, however, are
not used in the 'AAA', 'DDD', 'DD', or 'D'
categories.
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DESCRIPTION OF IBCA'S LONG-TERM RATINGS
AAA Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or
financial conditions are unlikely to increase investment risk
substantially.
AA Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very
significantly.
A Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
BBB Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic
or financial conditions are more likely to lead to increased
investment risk than for obligations in other categories.
BB Obligations for which there is a possibility of investment risk
developing. Capacity for timely repayment of principal and interest
exists, but is susceptible over time to adverse changes in business,
economic or financial conditions.
B Obligations for which investment risk exists. Timely repayment of
principal and interest is not sufficiently protected against adverse
changes in business, economic or financial conditions.
CCC Obligations for which there is a current perceived possibility of
default. Timely repayment of principal and interest is dependent on
favorable business, economic or financial conditions.
CC Obligations which are highly speculative or which have a high risk of
default.
C Obligations which are currently in default.
Notes:"+" or "-" may be appended to a rating to denote relative status within
major rating categories.
Ratings of BB and below are assigned where it is considered that
speculative characteristics are present.
DESCRIPTION OF THOMSON BANKWATCH'S LONG-TERM DEBT RATINGS
INVESTMENT GRADE
AAA The highest category; indicates that the ability to repay principal
and interest on a timely basis is very high.
AA The second-highest category; indicates a superior ability to repay
principal and interest on a timely basis, with limited incremental
risk compared to issues rated in the highest category.
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A The third-highest category; indicates the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations
with higher ratings.
BBB The lowest investment-grade category; indicates an acceptable capacity
to repay principal and interest. Issues rated "BBB" are, however,
more vulnerable to adverse developments (both internal and external)
than obligations with higher ratings.
Non-Investment Grade
(Issues regarded as having speculative characteristics in the likelihood of
timely repayment of principal and interest.)
BB While not investment grade, the "BB" rating suggests that the
likelihood of default is considerably less than for lower-rated
issues. However, there are significant uncertainties that could
affect the ability to adequately service debt obligations.
B Issues rated "B" show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse
developments could well negatively affect the payment of interest and
principal on a timely basis.
CCC Issues rated "CCC" clearly have a high likelihood of default, with
little capacity to address further adverse changes in financial
circumstances.
CC "CC" is applied to issues that are subordinate to other obligations
rated "CCC" and are afforded less protection in the event of
bankruptcy or reorganization.
D Default
Ratings in the Long-Term Debt categories may include a plus (+) or minus (-)
designation, which indicates where within the respective category the issue is
placed.
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